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Theory Fall 2013 Dr. Heba Nassar, Dr. Abdel-Hameed Nawar Mr. Ahmed Ragab, Ms. Nesreen Selim

Tutorial (3) on Chapter 3: Preferences

(Q1) TRUE/FALSE:

(1) If preferences are transitive, more is always preferred to less. (2) The marginal rate of substitution measures the distance between one indifference curve and the next one. (3) A consumer with convex preferences who is indifferent between the bundles (1, 4) and (9, 2) will like the bundle (5, 3) at least as well as either of the first two bundles. (4) Omar has an indifference curve with equation x 2 = 20 - 4x11/2. When Omar is consuming the bundle (4, 16), his MRS is -5/4. (5) If there are two goods, if a consumer prefers more of each good to less, and if she has a diminishing marginal rate of substitution, then her preferences are convex. (6) If Mayar has more classical records than rock and roll records, she is willing to exchange exactly 1 classical record for 2 rock and roll records, but if she has more rock and roll records than classical records, then she is willing to exchange exactly 1 rock and roll record for 2 classical records. Mayar has convex preferences.

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(Q2) MULTIPLE CHOICE QUESTIONS:

(1) If two goods are both desirable and preferences are convex, then: a. there must be a kink in the indifference curves. b. indifference curves must be straight lines. c. if two bundles are indifferent, then an average of the two bundles is worse than either one. d. the marginal rate of substitution is constant along indifference curves e. None of the above. (2) If there are only two goods, if more of good 1 is always preferred to less, and if less of good 2 is always preferred to more, then indifference curves: a. slope downward. b. slope upward. c. may cross. d. could take the form of ellipses. e. None of the above. (3) Preferences are said to be monotonic if a. all goods must be consumed in fixed proportions. b. all goods are perfect substitutes. c. more is always preferred to less. d. there is a diminishing marginal rate of substitution. e. None of the above. (4) Zahra consumes goods x and y. Her indifference curves are described by the formula y = k/(x + 7), where k is a positive constant number. Higher values of k correspond to better indifference curves. a. Zahra likes good y and hates good x. b. Zahra prefers bundle (12, 16) to bundle (16, 12). c. Zahra prefers bundle (8, 5) to bundle (5, 8). d. Zahra likes good x and hates good y. e. More than one of the above statements are true.

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(5) If the two bundles (3,9) & (1, 15) fall on the same indifference curve, then a weighted average bundle with a weight of 5/6 given to the first bundle will be: a. (8/3, 10) & is strictly prefered to the other 2 bundles. b. (10/3, 4) & is strictly prefered to the other 2 bundles. c. (8/3, 10) & is weakly prefered to the other 2 bundles. d. (10/3, 4) & is weakly prefered to the other 2 bundles. (6) Nader’s indifference curves are circles, all of which are centered at (12, 12). Of any two indifference circles, he would rather be on the inner one than the outer one. a. Nader’s preferences are not complete. b. Nader prefers (16, 17) to (10, 10). c. Nader prefers (10, 17) to (10, 10). d. Nader prefers (8, 8) to (17, 21). e. More than one of the above statements are true. (7) If two goods are perfect complements, so: a. there is a bliss point and the indifference curves surround this point. b. consumers will only buy the cheaper of the two goods. c. indifference curves have a positive slope. d. people's preferences are influenced by the choices of others. e. None of the above. (8) Mohamed has indifference curves with the equation x2 = K - 4x11/2, where larger values of the constant K correspond to higher indifference curves. If good 1 is drawn on the horizontal axis and good 2 on the vertical axis, what is the slope of Mohamed’s indifference curve when his consumption bundle is (4, 12)? a. -4/12 b. -12/4 c. -1 d. -21 e. -2

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(9) Adam’s indifference curves have the equation x B = constant/xA, where larger constants denote better indifference curves. Adam strictly prefers the bundle (5, 13) to a. the bundle (13, 5). b. the bundle (6, 12). c. the bundle (9, 12). d. more than one of these bundles. e. none of these bundles.

(Q3) QUESTIONS AND PROBLEMS:

You may use graphs to illustrate your answer.

(1) If good X is measured on the horizontal axis and good Y on the vertical, what can you say about the preferences of someone whose indifference curves are: A. parallel to the Y -axis? B. positively sloped with more desirable indifference curves as one moves to the right? C. negatively sloped with more desirable indifference curves as one moves to the left? (2) Draw graphs with quantities of cheese lover’s pizza on the horizontal axis and quantities of super supreme pizza on the vertical axis to illustrate the following situations. In each case draw two different indifference curves and make a little arrow pointing in the direction of greater preference. A. Hayam loves cheese lover’s pizza and hates super supreme pizza. B. Kareem hates super supreme pizza and is completely indifferent about cheese lover’s pizza. (3) Use the proof by contradiction to show that “Indifference Curves cannot intersect.” (4) A preference relation is “well-behaved” if it is monotonic and convex. Explain monotonicity and convexity of a preference relation. (5) When more of a commodity is always preferred, the commodity is a good. Use this statement to argue for the following proposition “If every commodity is a good then indifference curves are negatively sloped.”

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