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#cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-3-utility-theory #study-session-4

Question

Tom Warren currently has 50 blueberries and 20 peanuts. His marginal rate of substitution of peanuts for blueberries, MRS_pb equals 4, and his indifference curves are strictly convex.

Suppose that Warren is indifferent between his current bundle and one containing 40 blueberries and 25 peanuts. Describe Warren’s MRS_pb evaluated at the new bundle.

Solution

[...]

Answer

The new bundle has more peanuts and fewer blueberries than the original one, and Warren is indifferent between the two, meaning that both bundles lie on the same indifference curve, where blueberries are plotted on the vertical axis and peanuts on the horizontal axis. Because his indifference curves are strictly convex and the new bundle lies below and to the right of his old bundle, his MRS_pb must be less than 4. That is to say, his indifference curve at the new point must be less steep than at the original bundle.

Parent (intermediate) annotation

Open it
re strictly convex. Suppose that Warren is indifferent between his current bundle and one containing 40 blueberries and 25 peanuts. Describe Warren’s MRS pb evaluated at the new bundle. Solution <span>The new bundle has more peanuts and fewer blueberries than the original one, and Warren is indifferent between the two, meaning that both bundles lie on the same indifference curve, where blueberries are plotted on the vertical axis and peanuts on the horizontal axis. Because his indifference curves are strictly convex and the new bundle lies below and to the right of his old bundle, his MRS pb must be less than 4. That is to say, his indifference curve at the new point must be less steep than at the original bundle. <span><body><html>

Original toplevel document

3. UTILITY THEORY: MODELING PREFERENCES AND TASTES
t MRS BW must diminish as he moves toward more bread and less wine—the MRS BW is continuously changing as he moves along his indifference curve. EXAMPLE 2 Understanding the Marginal Rate of Substitution <span>Tom Warren currently has 50 blueberries and 20 peanuts. His marginal rate of substitution of peanuts for blueberries, MRS pb equals 4, and his indifference curves are strictly convex. Determine whether Warren would be willing to trade at the rate of 3 of his blueberries in exchange for 1 more peanut. Suppose that Warren is indifferent between his current bundle and one containing 40 blueberries and 25 peanuts. Describe Warren’s MRS pb evaluated at the new bundle. Solution to 1: MRS pb = 4 means that Warren would be willing to give up 4 blueberries for 1 peanut, at that point. He clearly would be willing to give up blueberries at a rate less than that, namely, 3-to-1. Solution to 2: The new bundle has more peanuts and fewer blueberries than the original one, and Warren is indifferent between the two, meaning that both bundles lie on the same indifference curve, where blueberries are plotted on the vertical axis and peanuts on the horizontal axis. Because his indifference curves are strictly convex and the new bundle lies below and to the right of his old bundle, his MRS pb must be less than 4. That is to say, his indifference curve at the new point must be less steep than at the original bundle. 3.4. Indifference Curve Maps There was nothing special about our initial choice of bundle a as a starting point for the indifferenc

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