Q 7
(a) What are indifference curves?
(b) State and explain the properties of indifference curves.
(c) Explain what factors could cause shift in the budget
line.
Using indifference curves, show how the labour/leisure trade-off
determines the reservation wage, wr, where there is non-labour
income, m, but no unemployment benefit. [50]
Show how the worker’s reservation wage and behaviour change if
she becomes entitled to unemployment benefit, b? [50]
Indifference curves allow us to show how an individual consumer
is willing to trade off one good for another without changing their
overall level of satisfaction or well-being. There are three
assumptions that are made about consumers that are central to the
consumer choice theory. Explain what each of the assumption means
in terms of consumer choice. For each one, provide an example of
the assumption not holding in the real world
Discuss the theory of consumer choice among two goods using
indifference curves and the budget constraint. Show how the result
changes if the price of a good changes.
Good X is a normal good. Use indifference curves and budget
lines to show the substitution and income effects of a price
decrease for Good X. Put “expenditures on other goods” on the
Y-axis, and clearly label all lines and curves. Make sure your
diagram clearly shows the income effect and the substitution
effect, and that you indicate which is the income effect and which
is the substitution effect.
b. Give a short one or two sentence explanation of what...
List and briefly explain each of the four properties of
indifference curves. Provide an example where you have made a
buying decision based on one or more of these properties. Justify
your answer.
Consider two goods, x and y. Using budget lines and indifference
curves show that a sales tax on good x is inferior to an income tax
that yields the same amount of revenue.