Question

My preference satisfies the law of diminishing MRS, and I am indifferent between two bundles: (9;10) and (10;9). 1 a) Can you say anything about whether the bundle (20;5) is more or less preferred than the bundles (9;10) and (10;9)? b) How would your answer to a) change if I also mentioned to you that I was indi⁄erent between (20;5) and (21;3)?

Answer 1

Since the consumer is indifferent between the given two bundles, these bundles lie on the same indifference curve.

a) The given bundles are: (9,10) and (10,9). From these bundles, it is clear that this indifference curve is downward sloping with a slope of -1. The following diagram represents this indifference curve:

This indifference curve has been derived using the point slope formula.

The point (20,5) does not lie on the given indifference curve. Hence, we cannot say anything about the consumer's preference of this bundle.

b) If the consumer is indifferent between (20,5) and (21,3), the indifference curve is given by the following diagram:

Since this indifference curve lies above the previous indifference curve and also contains the point (20,5), we can say that the consumer prefers the bundle (20,5) over the bundles (9,10) and (10,9).