Question: Consider the following utility function U(x, y) = x 0.4 y 0.6 . Is the assumption that more is better satisfied for both goods? Does

Consider the following utility function U(x, y) = x 0.4 y 0.6 .

Is the assumption that more is better satisfied for both goods?

Does the marginal utility of x diminish, remain constant, or increase as the consumer buys more x? Explain.

What is MRSx, y?

Is MRSx, y diminishing, constant, or increasing as the consumer substitutes x for y along an indifference curve?

On a graph with x on the horizontal axis and y on the vertical axis, draw a typical indifference curve (it need not be exactly to scale, but it needs to reflect accurately whether there is a diminishing MRSx, y). Also indicate on your graph whether the indifference curve will intersect either or both axes. Label

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2. Find out if there are other reference points that can be used as reasonable alternatives.

1. Identify your reference point when making a decision based on an element of risk.

3. If there are reasonable alternatives, think about your decisions based on the different reference points and see if there are any contradictions in the decisions.