True, False, or Uncertain? Justify your answers.

(c) John has monotonic preferences for two goods, X and Y . The price of Y is one dollar per unit. The following diagram illustrates one of his indifference curves, labelled U0. It also shows two budget lines corresponding to income levels M and M′, respectively, while the prices of X and Y remain constant. A = (xA, yA) is the optimal bundle when the income is M. When the income changes to M′, ceteris paribus, John’s new optimal bundle(s) must be located along the blue section.

 

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M' (e) (5 marks) Let M y YA B ХА D (d) (5 marks) Bob consumes only two goods, X and Y. Consider the price combinations A, B and C, in the following table. Bob's chosen bundle in each situation is also shown in the table. Bob's preference satisfies both WARP and SARP. X p: per-unit price of insurance, T: probability of accident, L: loss wealth from the accident X: amount of purchased insurance. Situation P, Py X Y A $2 $4 6 2 B $5 $5 3 5 C $8 $2 5 4 An insurance purchaser is an expected utility maximiser. The insurance is unfair in favour of the insurance company; that is, the per-unit premium is higher than the probability of insurance payout, p > T. The insurance model suggests that risk-averse consumers choose to be fully insured, i.e, X = L. M' (e) (5 marks) Let M y YA B ХА D (d) (5 marks) Bob consumes only two goods, X and Y. Consider the price combinations A, B and C, in the following table. Bob's chosen bundle in each situation is also shown in the table. Bob's preference satisfies both WARP and SARP. X p: per-unit price of insurance, T: probability of accident, L: loss wealth from the accident X: amount of purchased insurance. Situation P, Py X Y A $2 $4 6 2 B $5 $5 3 5 C $8 $2 5 4 An insurance purchaser is an expected utility maximiser. The insurance is unfair in favour of the insurance company; that is, the per-unit premium is higher than the probability of insurance payout, p > T. The insurance model suggests that risk-averse consumers choose to be fully insured, i.e, X = L.

Answer rating: 100% (QA)

True Johns monotonic preferences imply that he always prefers more of both goods to less Therefore when his income increases he will always want to consume more of both goods This means that his new o... View the full answer