Take it if you are confident, explain it step by step with each options

Which ofthe following statements is/are true? The fact that the substitution effect tends to dominate the income effect can help to explain backward sloping labour supply curves Even in theory it is never possible to combine several risky assets into a risk free portfolio An economy that consists of 2 sectors that both use decreasing returns to scale technologies is characterised by a concave production possibilities frontier A) Only statementl B) Only Statement III C) Only Statements II and Ill D) All statements I, II and III E) None of the statements I, II and Ill Statement | is false. It is the other way around the income effect pushes agents to work less (consume more leisure) and if it dominates working hours can decrease in response to an increase in wages. For details see Steven's lecture on Labour markets. Statement II is false. When 2 risky assets are perfectly negatively correlated (correlation coefficient of -1) it is possible to construct a portfolio with 0 variance of the return. You can nd an example of such case in problem 5 from tutorial sheet 7 (week 8) of semester 1. Statement III is true. For a derivation see for example problem 5 from tutorial sheet 8 (week 9) of semester 1 or the solutions to the December class exam (question 12)