1. ECON 102 Tutorial: Week 4 Shane Murphy www.lancaster.ac.uk/postgrad/murphys4

2. Question 1

4. Question 2

7. Question 3

8. Question 4 The two points in the figure below indicate the resolution/screen size combinations of two monitors. Both resolution and screen size are desirable properties: all things equal, consumers prefer monitors of bigger size and better resolution to monitors of smaller size and poorer resolution. a)Martha prefers monitor A to monitor B. In the figure below, draw an indifference curve that indicates this fact. b)Alice prefers monitor B to monitor A. In the figure below, draw an indifference curve that indicates this fact. c)Do the two indifference curves intersect? d)Does this violate the requirement that indifference curves do not cross? Why or why not?

9. Question 5 Consider the two indifference curves for an individual consumer given below. As stated in the lecture, indifference curves should never intersect if the consumer’s preferences are monotonic and transitive. Let’s see why. Here’s our approach. Just for a moment, we’ll assume that indifference curves can intersect. We’ll see what sort of conclusions we reach.... a)According to monotonicity of preferences, does the consumer prefer bundle A or B? b)According to monotonicity of preferences, does the consumer prefer bundle C or D? c)Based on your answer to part (a) and transitivity of preferences, argue that bundle D is preferred to bundle C. d)Do your answers to parts (b) and (c) make sense? Use your answer to argue that indifference curves should never intersect. I2I2 I1I1 X2X2 X1X1 Bundle C Bundle A Bundle B Bundle D

10. Question 6 John and Alisha are stranded on a dessert island, and consume only coconuts and fish. Currently, John has 10 coconuts (C) and 2 fish (F). Alisha has 2 coconuts and 10 fish. At their respective endowments, John’s MRS J C, F = 1/5; while Alisha’s MRS A C, F = 5. a) At his initial bundle, what is the maximum number of coconuts John is willing to give to Alisha to obtain one of her fish? MRS J C, F = 1/5 means John is willing to give up 1/5 F to get 1 C. So to get 1 F, he is willing to give up 5 C. b) At her initial bundle, what is the minimum number of coconuts Alisha would require to give one of her fish to John? MRS A C, F = 5 means Alisha is willing to give up 5 F to get 1 C. So to get 1F, she is willing to give up only 1/5 C. c) Based on your answers to parts (a) and (b), describe a trade between John and Alisha that would make both consumers better off. John gives Alisha C in exchange for F

11. Next Week  Please check Moodle for next week’s worksheet and for maths questions  Links to Khan Acadamy videos for some additional examples on the basics: indifference curves and MRS, budget line, optimal point on a budget line.indifference curves and MRSbudget lineoptimal point on a budget line

12. A few things we need to know: benefit of 1 additional unit of good 1 (expressed in units of good 2) cost of 1 additional unit of good 1 (in units of good 2) If MRS 1,2 > P 1 /P 2 then buy more of good 1 and less of good 2. If MRS 1,2 < P 1 /P 2 then buy more of good 2 and less of good 1.