Consider an individual with preferences defined over two goods, X1 and X2. This consumer has preferences such that she must have 1/3 of a unit of X1 with every 1/2 unit of X2. In addition, let P1 = 1, P2 = 1, and suppose this individual has an income of $45,000. (a) Draw indifference curves with X1 on the horizontal axis to depict this consumer’s 1 preferences. Comment.

There is a general procedure for constructing indifference curves given a “verbal” description of the preferences. First plop your pencil down on the graph at some consumption bundle (x1, x2). Now think about giving a little more of good 1, Δx1, to the consumer, moving him to (x1 +Δx1, x2). Now ask yourself how would you have to change the consumption of x2 to make the consumer indifferent to the original consumption point? Call this change Δx2. Ask yourself the question “For a given change in good 1, how does good 2 have to change to make the consumer just indifferent between (x1 + Δx1, x2 + Δx2) and (x1, x2)?” Once you have determined this movement at one consumption bundle you have drawn a piece of the indifference curve. Now try it at another bundle, and so on, until you develop a clear picture of the overall shape of the indifference curves.There is a general procedure for constructing indifference curves given a “verbal” description of the preferences. First plop your pencil down on the graph at some consumption bundle (x1, x2). Now think about giving a little more of good 1, Δx1, to the consumer, moving him to (x1 +Δx1, x2). Now ask yourself how would you have to change the consumption of x2 to make the consumer indifferent to the original consumption point? Call this change Δx2. Ask yourself the question “For a given change in good 1, how does good 2 have to change to make the consumer just indifferent between (x1 + Δx1, x2 + Δx2) and (x1, x2)?” Once you have determined this movement at one consumption bundle you have drawn a piece of the indifference curve. Now try it at another bundle, and so on, until you develop a clear picture of the overall shape of the indifference curves.

Indifference curves illustrateGroup of answer choicesa firm's profits.the prices of two goods.a consumer's preferences.a consumer's budget.

Suppose there are only two goods in the economy: Yo-yos and Marbles. Bob only cares about his consumption of Yo-yos; the more Yo-yos he has the happier he is, regardless of his consumption of Marbles. In contrast, Lucy only cares about his consumption of Marbles; the more Marbles she has the happier she is, regardless of her consumption of Yo-yos. (a) Draw Bob’s indifference curves, putting Yo-yos in the x-axis and Marbles in the y-axis. (b) Draw Lucy’s indifference curves, putting Yo-yos in the x-axis and Marbles in the y-axis. (c) Do Bob’s and Lucy’s preferences comply with the property of diminishing marginal rate of substitution? (d) Are Bob’s and Lucy’s preferences transitive?

If the tastes of a consumer satisfy the assumption of transitivity, her indifference curves must:Group of answer choicesNot cross the axesHave a positive slopeNot cross one anotherBend toward the originAll of the above

Fill in the spaces:a. Along an indifference curve ____________ is constant.b. The rate at which a consumer is willing to substitute one good for another, holding utilityconstant, is given by the ____________ of an indifference curve. This rate is called the_________________________________.c. If at a given combination of X and Y, a consumer’s marginal rate of substitution is 4, thismeans that the consumer is willing to give up ______ units of Y for another X or ______units of X for another Y.d. If a consumer is choosing the levels of goods X and Y in order to maximize utility with agiven budget the _________ equals the ____________ ratio of the goods.e. The rate at which a consumer can substitute one good for another in the market is given bythe ______ of the budget line and is equal to the __________ratio of the two goods