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Answer to Question #63097 in Microeconomics for Ahamed

Question #63097
TRUE or FALSE. (25 points) All credits are assigned to explanations.
You need to provide adequate explanations to obtain any credit.

(a) A consumer has strictly monotonic preferences that can be repre-
sented by a utility function. She chooses bundle A under certain
prices and income. Furthermore, bundle A is cheaper than bundle
B under those prices. If prices change and bundle B becomes more
expensive than bundle A, it is possible for the consumer to choose
bundle B instead.

(b) Jerry's world consists of two commodities Lasagna and Choco-
lates. Given any two bundles consisting of Lasagna and Choco-
lates, Jerry always prefers the bundle that has more lasagna. Only
in the case where two bundles have the same amount of lasagna,
Jerry prefers the bundle with more Chocolates. Then, Jerry's
preferences are complete.


Expert's answer
(a) If consumer preferences are represented by a utility function, then she chooses such combination of bundles A and B, for which MUa/Pa = MUb/Pb, so if prices change and bundle B becomes more expensive than bundle A, it is not possible for the consumer to choose bundle B instead, so this statement is FALSE.

(b) If Jerry's world consists of two commodities Lasagna and Chocolates and Jerry always prefers the bundle that has more lasagna, then lasagna has higher utility and such situations may be possible in some cases, when Jerry has enough budget to buy the particular bundle. So, the statement is TRUE.

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