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ECS2601
MICROECONOMICS
2020
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SUGGESTED SOLUTIONS FOR MAY/JUNE 2015
QUESTION 1
1a. Consider the following baskets of goods:
FOOD CLOTHING
A 8 3
B 6 6
C 3 8
If preferences satisfy all requirements, is A preferred to C or C to A? Explain your answer.
Basket A has more food than basket C.
Basket C has more clothing than basket A.
Therefore, basket A and C cannot be compared without additional information.
1b. An island economy produces only two goods – coconuts and pineapples. There are five
people (A, B, C, D and E) living on the island, with these preferences:
A has a strong preference for
pineapples. B has a strong preference
for coconuts.
C doesn’t care for pineapples (assigns no value to
them). D doesn’t care for coconuts (assigns no value to
them).
E will only consume pineapples and coconuts in the fixed proportion of one pineapple to one
coconut.
For each of these five individuals, construct a representative indifference curve
with pineapples on the horizontal axis and coconuts on the vertical axis.
Person A:
Coconuts
A
Pineapples
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Person B:
Coconuts
B
Pineapples
Person C:
Coconut
C
Pineapple
Person D:
Coconut
D
Pineapple
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Person E:
Coconuts
E
Pineapples
1c. The diagram below depicts the change in optimal consumption bundles for Kgomotso when the
price of bread decreases. Decompose the change into the income and substitution effects. Indicate
the total effect, income effect and substitution effect in the diagram. (6 marks)
Food
bread
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ECS2601
MICROECONOMICS
2020
Downloaded by: Mgwebs |
Distribution of this document is illegal
, Stuvia.com - The study-notes marketplace
SUGGESTED SOLUTIONS FOR MAY/JUNE 2015
QUESTION 1
1a. Consider the following baskets of goods:
FOOD CLOTHING
A 8 3
B 6 6
C 3 8
If preferences satisfy all requirements, is A preferred to C or C to A? Explain your answer.
Basket A has more food than basket C.
Basket C has more clothing than basket A.
Therefore, basket A and C cannot be compared without additional information.
1b. An island economy produces only two goods – coconuts and pineapples. There are five
people (A, B, C, D and E) living on the island, with these preferences:
A has a strong preference for
pineapples. B has a strong preference
for coconuts.
C doesn’t care for pineapples (assigns no value to
them). D doesn’t care for coconuts (assigns no value to
them).
E will only consume pineapples and coconuts in the fixed proportion of one pineapple to one
coconut.
For each of these five individuals, construct a representative indifference curve
with pineapples on the horizontal axis and coconuts on the vertical axis.
Person A:
Coconuts
A
Pineapples
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Person B:
Coconuts
B
Pineapples
Person C:
Coconut
C
Pineapple
Person D:
Coconut
D
Pineapple
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Person E:
Coconuts
E
Pineapples
1c. The diagram below depicts the change in optimal consumption bundles for Kgomotso when the
price of bread decreases. Decompose the change into the income and substitution effects. Indicate
the total effect, income effect and substitution effect in the diagram. (6 marks)
Food
bread
Downloaded by: Mgwebs |
Distribution of this document is illegal
