ECON 4001.01 Study Guide - Midterm Guide: Tax Rate, Demand Curve, Inferior Good

A. True, False, Uncertain and Explain: determine whether the statement is true, false or uncertain and explain your reasoning – you only earn points for your explanation. 1. If preferences are convex, the set of points at least as good as any given point is a convex set. 2. If preferences are strictly convex, the set of points “no better than” any given point is a convex set. 3. If a consumer has strictly convex preferences over two goods and she is indifferent between bundle A given by (4, 6) and bundle B given by (2, 8), then she prefers bundle C given by (3, 7) over either bundle A or bundle B. 4. If a consumer has preferences over two "bads" then these preferences cannot be convex. 5. If apples (a good) are on the horizontal axis and dirty socks (a bad) are on the vertical axis then the indifference curves that represent convex preferences over these two items is upward sloping and flattens out as moving from left to right. 6. If preferences are not monotonic then they cannot be transitive

A consumer has preferences over two goods: x and y. Three bundles, which all lie on the same indifference curve for this consumer, are shown in the following table.

Which of the following statements regarding these bundles is correct?

1. In each of the following situations, the possible bundles contain apples and oranges and either 0,

1 or 2 of each. An example bundle would be 2 apples and 1 orange = (2, 1). In each part, there is a

description of a set of preferences. If an ordering can be made, make the ordering of the 9 possible

bundles, and list any bundles that would be on the same indifference %u201Ccurve%u201D. If the ordering cannot

be made, give an example of which bundles cannot be ranked and explain which assumption on

preferences is being violated (3 points)

a) Non-satiated in both goods. Apples always better than oranges.

b) In bundles with zero of either oranges or apples, the bundle with more oranges is better. If the

bundle has 0 oranges, the bundle with more apples is better. In bundles with at least 1 apple,

the best bundle is the one that has the biggest total of apples and oranges. In bundles with

at least 1 orange, the better bundle is the one that generates the biggest number when the

number of apples is divided by the number of oranges.

c) Non-satiation applies to all relevant bundles (So (1, 2) pref (1,0)). For the others%u2026

(1, 0) pref (0,1) (1, 1) pref (0,2) (2, 0) pref (1,1)

(2, 0) pref (0,1) (0, 2) pref (2,0) (1, 2) pref (2,0)

(0, 2) pref (1,0) (2, 1) pref (0,2) (1, 2) pref (2,1)