Class Question

Economics Economics Questions
1

Q from a person on a different forum.

"A consumer who consumes just 2 goods, likes each as long as he does not have too much of it. Once the quantities of each exceed certain amounts, he starts to dislike each. Furthermore, the preferences of this consumer are convex. Draw an indifference diagram that represents his preferences. "

Its been years since mac/micro for me. I cant answer this w/o trying to explain something to him and sounding “philosophical”. Any help?

2

Diminishing marginal returns. (A) To draw an indifference curve, simply draw a Cartesian plane, where X1 (good one) is on the x-axis, and where x2 (good two) is on the y-axis. Utility will represent the z-axis (three dimensional), but he/she probably doesn’t expect you to draw a three dimensional graph. Then draw a down-ward sloping curve, where the slope represents the marginal rate of substitution (this curve is the indifference curve). This is the first derivative of a utility function. (B) If there was only one good, and he wanted total utility, then you would draw a graph where U (utility) is represented by the y-axis, and where Y (commodity) is represented by the x-axis. Simply draw a line starting from the origin with a falling slope (getting flatter and flatter). (A) is the first derivative of (B).

(A) EG:

indiff11.gif
indiff11.gif400×288 4.73 KB

(B) EG:

Tainter11.gif
Tainter11.gif548×312 3.61 KB

3

Thank very much esuric, I’ll send that to him and give you due credit.

4

This may look strange, even bizarre, but here’s the likely solution:

BlissPoint.jpg
BlissPoint.jpg800×600 36.3 KB

5

This question is rather odd. “He starts to dislike each?” What is this imaginary person consuming? Heroin and cocaine? There’s a difference between diminishing marginal utility (“he likes each additional unit less than the previous unit”) and what this question is saying. Anyway, here’s a convex indifference curve:

As you see, the marginal rate of substitution decreases as you move along the curve, which qualifies it to be a convex indifference curve.

6

I know Kaju…real application of it is very confusing. 2 specific goods, with an expiration of utility or based on volume. This is crap marketers try to figure out.

Thanks again guys I’ll forward it and give credit like always.