Exercise 2

I. Objectives

II. Data

Coconuts (X) Bagels (Y) Slope

III. Questions

  1. Using the given equation, sketch the indifference curve with Good 1 (coconuts) on the horizontal axis.

  2. Indicate Point M on the curve such that the number of coconuts consumed is 20. The corresponding number of bagels is _____, and the slope of the curve at that point is ______. [Note: You may obtain both values from the calculator above.]

  3. At Point M, the consumer is willing to give up ________ bagel(s) in order to gain _____ coconut(s).

  4. Consider Point N on the curve such that X = 100. At N, the marginal rate of substitution is ________ [ coconuts per bagel / bagels per coconut ].

  5. Does the given indifference curve exhibit the Law of Diminishing Marginal Rate of Substitution? Explain.

  6. Suppose the indifference curve is a negatively-sloped straight line. Using a sketch (with Good 1 on the horizontal axis), one may show that as the amount of Good 1 increases, the MRS [ decreases / increases / remains constant ].

  7. According to the Law of Diminishing Marginal Utility, as the consumption of coconuts increases, ceteris paribus, the consumer's utility [ rises / falls ] at [ an increasing / a decreasing ] rate.