Consider a consumer maximizing his preferences over a budget set (which is defined by a weak...

Consider a consumer maximizing his preferences over a budget set (which is defined by a weak inequality involving prices and income). Which of the following assumptions on preferences guarantees that a bundle lying in the interior of the budget set is not a maximizer?

(A) Transitivity (B) Convexity (C) Continuity (D) Monotonicity (E) Homotheticity

Expert Solution

The correct option is d.

a) Assumption of transitivity is when bundle A is preferred to bundle b and bundle b is preferred to bundle c, then bundle a would be preferred to bundle c also. This doesn't prove that bundle not lying on budget set is not a maximiser.

b) Assumption of convexity is that average combinations are preferred to extreme combinations. But all these combinations are on same line. No combination is on the interior side.

c) Assumption of continuity is that there is no sudden jump in the ranking of alternatives by the consumers. This doesn't speak about bundle set not being maximiser if it lies on the inner side.

d) Assumption of monotonicity is that more is preferred to less by the consumers. So the bundle which is less and is lying on the inner side of the budget set will not be preferred and the bundle having more and lying on the budget set will be preferred by the consumers. This will also lead to maximization by offering more compared to the bundle which has less.

Rahul Sunny answered 1 year ago

Consider a consumer with textbook preferences defined over two goods x1 and x2. Why is the...

Consider a consumer with textbook preferences defined over two goods x1 and x2. Why is the condition MRS = p1/p2 necessary for utility maximization? Is this condition alone sufficient?

Consider a consumer with textbook preferences defined over two goods X1 and Y2. Why is the...

Consider a consumer with textbook preferences defined over two goods X1 and Y2. Why is the condition MRS = p1/p2 necessary for utility maximization? Is this condition alone also sufficient?

Consider an individual with preferences defined over two goods, X1 and X2. This individual has preferences...

Consider an individual with preferences defined over two goods, X1 and X2. This individual has preferences that can be represented by the following utility function: u(X1, X2) = X1 + X 0.5 2 Let P1 = 4 and P2 = 2. In addition, suppose this individual has an income of $120. (a) Write down the expression for this consumer’s marginal rate of substitution of X1 for X2 (MRS12). Identify the distinguishing feature of this particular MRS12. (b) Calculate the optimal...

Consider a one period economy in which the representative consumer has preferences over leisure (l) and...

Consider a one period economy in which the representative consumer has preferences over leisure (l) and consumption (c) described by the utility function u(c, l) = c0.5l0.5 This consumer has 1 unit of time h to spend between leisure, l, and labor supply, Ns. The representative firm’s production function is Y = zNd where Nd is labor demand and z = 2 is total factor productivity. The government buys one unit of consumption good, meaning that, G = 1. (a)...

consider a world off to good x and y and consider the following preferences defined over...

consider a world off to good x and y and consider the following preferences defined over all bundles of positive quantities of these two goods (Xa,Ya)>=(Xb,Yb) if and only if Xa>Xb or Xa=Xb and Ya>=Yb in other words this consumer always prefers the bundle that has more x. If two bundles have the same amount of X, then the consumer rephrase the one with more y 1) show that this preference violates one of the axioms of rational choice

Consider Phil who is a utility maximizing consumer with preferences between pizza and burgers, both normal goods.

Consider Phil who is a utility maximizing consumer with preferences between pizza and burgers, both normal goods. Phil currently consumes 5 slices of pizza a week at a price of $2.50 a slice. Suppose the price of pizza were to increase to $3.00 a slice, causing Phil’s consumption to fall to 3 slices. Keith Yacucha Econ 103 Fall 2020Graph Phil’s personal demand curve for pizza, demonstrate how this change in price causes Phil to change his consumption, be sure to...

Consider the case of Timmy, a consumer with preferences over oranges (O) and Sauerkraut (S) that...

Consider the case of Timmy, a consumer with preferences over oranges (O) and Sauerkraut (S) that give him a utility function U=ln(O) + S. A. Given that Timmy has an allowance of I and faces prices of Po and Ps, use the Lagrangian Multiplier method to find his optimal consumption of O and S. B. Demonstrate whether Sauerkraut is a normal or inferior good for Timmy. C. Find Timmy’s indirect utility function. In a world where I=20, Po = 1...

Problem 2: Consider a representative consumer whose preferences over consumption and leisure are given by the...

Problem 2: Consider a representative consumer whose preferences over consumption and leisure are given by the following utility function: U˜(C, l) = U(C) + V (l) (2) where U(.) and V (.) are twice differentiable functions (that is, their first and second derivatives exist). Suppose that this consumer faces lump-sum taxes, T, and receives dividend income, Π, from the 100% ownership of shares of the representative firm. A) Write down the consumer’s optimization problem and the first-order conditions determining optimal...

Consider a consumer with preferences over two goods (good x and good y) given by u...

Consider a consumer with preferences over two goods (good x and good y) given by u ( x , y ) = x ⋅ y. Given income of I and price of good yas $ P yper pound and price of good xgiven as $ P xper pound, the consumer chooses the optimal consumption bundle given as x ∗ = I 2 P x and y ∗ = I 2 P y . Given P x = $ 1per pound...

Consumer Theory. A consumer has preferences over goods x and y that can be represented by...

Consumer Theory. A consumer has preferences over goods x and y that can be represented by the utility function ?(?,?) = ?+??(?) where ln is the (natural) log function. The consumer has income I (all to be spent on x and y) and the price of x and y are px and py respectively. (You may assume the “at least as good as x” set B(x) is a convex set, so the solution to the consumer’s problem will be a...

Question