HEALTH ECONOMICS CLASS Indifference Curves and Preferences a. Using a picture of an indifference curve, illustrate...

HEALTH ECONOMICS CLASS

Indifference Curves and Preferences
a. Using a picture of an indifference curve, illustrate graphically the concept of
diminishing marginal returns.
b. When we say that a consumer’s utility function is U (H, X), what assumption
are we making as economists that non-economists sometimes disagree with?

Solutions

Expert Solution

A. The slope of the indifference curve is negative. It is because for every unit increase in the consumption of one good, there are a unit decrease in the consumption of another good. Diminishing marginal utility shows this. MRS is the slope of the indifference curve.

B. If U(H,X) represent utility of two goods, economist have Various assumption. One of it is rationality. Economists assume that people are rational whereas this is not true. Rationality means that people have complete knowledge about all the goods and services whereas this is not the case.

Also the assumption of transitivity. If a person prefers good X to Y and good Y to Z then he must prefer X to Z but this is not always the case. In any other situation, the consumer can prefer Z to X or Y. It may not be necessary that the consumers will only prefer X to Z always as it is just an assumption.

Rahul Sunny answered 1 year ago

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