Question

Part III) Fill out the blanks in the following statements.

1. Indi erence curves are usually convex, or bowed inward. The term convex

means that the slope of the indi erence curve increases (i.e., becomes less

negative) as we move down along the curve. In other words, an indiference

curve is convex if the MRS (      ) along the curve. (2 points)

2. ..... In this case, the MRS of apple juice for orange juice is 1: Bob is

always willing to trade 1 glass of one for 1 glass of the other. In general,

we say that the two goods are (      ) when the marginal rate

of substitution of one for the other is a constant. (2 points)

3. The (      ) indicates all combinations of F and C for which

the total amount of money spent is equal to income.

Answer 1

1. Decreasing

Indifference curve is convex when MRS Decreases because consumer are willing to give up and less number of good1 to acquire good2, according to law of diminishing MRS.

2. Perfect substitute

When goods are perfect substitutes of each other, then MRS is constant. ( perfect goods are those goods for which a person becomes indifferent or it becomes impossible for him to choose between the two).

3. Budget line

Budget line shows all possible combination of goods which an individual can purchase with his given income. In this case, slope is equal to negative of price ratio.