Consider the following three consumption bundles (X1,X2)=(10,10) ; (X1,X2)=(15,10) ; (X1,X2)=(3000,8).

Answer each of the following statements True/False/Uncertain. Give a full explanation of your answer including graphs where appropriate. (When in doubt, always include a fully labeled graph.)

A) Consider the following three consumption bundles (X1,X2)=(10,10) ; (X1,X2)=(15,10) ; (X1,X2)=(3000,8). Non-satiation implies that (15,10) is preferred to (10,10) but does not imply that (3000,8) is preferred to (10,10).

B) It is not theoretically possible for two indifference curves to cross if the preference relations they are based on satisfy the assumptions of completeness, transitivity and non-satiation.

Expert Solution

A

Bundle [15,10] is preferred to bundle [ 10, 10] because it contains more of X₁ and same quantity of X₂. Bundle [10, 10] and [3000,8] may be on same indifference curve. so the statement is true.

B

The statement is true because if two indifference curves cross it would mean that same bundle gives two utility levels which is not possible.Transtivity requires that if A>B and B>C then A>C and if A~B and A~C then B~C. Let B>C and A is intersection point Now A~B and A~C. Transtivity requires that B~C which is not the case.

Rahul Sunny answered 2 years ago

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