True/False 1. Label the following statements as true/false. If a statement is fa

Question

True/False 1. Label the following statements as true/false. If a statement is false briefly explain why a) Suppose we have income M, and two goods ri and r2 with respective prices p and p2 (where Ph,p2>O). If p2 increases, all else constant, then the feasible set will increase b) Suppose there are four bundles a consumer can choose from: A-(1,4), B-(2,3), C-(2,4), D- (3,3). The consumer receives 10 utility from bundle D (U(D) U(A) 4. This consumer's preferences are well-behaved. 10), and U(B) 8, U(C) c) A utility function is a functional representation of a consumer's indifference map. Each level of utility corresponds to a unique indifference curve.

Explanation / Answer

a) The feasible set in consumer theory will represent all the points below and on the budget line that satisfy the budget constraints. For a budget constraint p1x1 + p2x2 = M, as p2 increases, the budget line rotates inwards. The area under the budget line will decrease. Therefore, the feasible set of consumption bundles will not increase rather it will decrease. Hence the statement is false.

b) A = (1,4) and U(A) = 4

B = (2,3) and U(B) = 8

C = (2,4) and U(C) = 6

D = (3,3) and U(D) = 4

The consumer preferences are not well behaved preferences because these preferences do not satisfy the assumption of monotonicity. According to this assumption "more is better" which means that a bundle which has more of atleast one commodity, must be preferred over the other bundle. In the above case, we have  B = (2,3) with U(B) = 8 and C = (2,4) with U(C) = 6. This violates the assumption of monotonicity because in consumption bundle C, more of atleast one good is provided but its utility is lesser than utility of consumption bundle B. Therefore, prefernces are not well behaved and the statement is false.

c) True. An indifference curve represents the different consumption bundles that give the consumer the same level of utility. If the utility varies in the functional form, it is an indifference map.

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