ECN100 HW2 3
(1) Draw an indifference curve map with the quantity of pennies are on the horizontal axis and the quantity of nickels are on the vertical axis. Given the shape of your indifference curve, how would you describe the typical relationship between these two “products”?
The two goods are perfect substitutes for each other. 5pennies are equivalent to a nickel.
(2) You and I are in consumer equilibrium. CDs cost 10 dollars each and cassette tapes only
2 dollars each. I consume CDs and cassettes. You consume only cassettes. What can you infer about my MRS (marginal rate of substitution) of CDs and tapes? What about your
Since both individuals are in consumer equilibrium, for you, the MRS should equal the price ratio since you consume …show more content…
But since Px is higher, your budget curve pivots inward. With the substitution effect you consume less of X and more of Y. With the income effect you consume less of both goods
(since real income has decreased). Therefore at the new equilibrium, you consume less of X and the amount of consumption of Y depends on the relative strength of the two effects.
(6) You are willing to accept risk for rewards. For example, you are willing to take real tough courses at UCD because if you do well, it will look like you are a hard worker on your transcript (and that is a good thing). Okay, the reward is what could be on your transcript but the risk is that you MAY pull down your GPA. Draw an indifference curve for your two
“goods”, risk and reward for your decision to take or not take the hard courses. Put the good, reward, on the X axis. What do micro-economists call these two goods with respect to the indifference map?
Now, suddenly you are really afraid to take the hard courses (that is, you now have a greater fear of failure). How does that change your indifference map?
You have upward sloping indifference curves between risk and reward, i.e. for a given level of utility; if you face more risk then you require more rewards to keep you at that level of utility. You