Questions:
1. What assumptions about preferences imply that indifference curves have the "bowed-in" shape they are assumed to have?
2. Explain the terms marginal utility and diminishing marginal utility in your own words, using the utility function graph in your explanation.
3. Give the definitions for marginal rate of substitution (MRS), and the price ratio. Then explain them in your own words, referring to the notions of the psychic tradeoff and the market tradeoff. What is similar about the concepts of the MRS and the price ratio? What is different ?
4. Consider Eleanor, a Barnard junior, who purchases soda (S) and tennis balls (T).
a. Assume that the following bundles are all on her budget line. For each bundle, tell if Eleanor is at an optimal point. If not, does she prefer a market basket on the budget line with more soda or more tennis balls? Explain why in detail using the concept of marginal utility per dollar. Draw a budget line and indifference curves, and mark and label points A, B and C to show where Eleanor would be if each were true.
i. MRS = 5, PS/PT = 3
ii. MRS = 2, PS/PT = 3
iii. MRS = 3, PS/PT = 3
b. Interpret the slope of the budget line in words