If the price of train rides is 1 and the price of food is 10, and the MRS of food for train rides expressed by Karl is 5, is Karl a utility maximizer? How do you know? If Karl is not maximizing, what should he do to improve his situation?
What will be an ideal response?
Since the slope of the budget line (10/1) is greater than the slope of the indifference curve (5) Karl is not maximizing his pleasure. Viewed graphically Karl's situation would appear as follows.
He should eat less food and take more train rides as the dotted curve above shows.
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Consider two economies: A and B. If the gap between the growth rate of money supply and growth rate of real GDP is larger in country A than in country B, then according to the quantity theory of money:
A) the inflation rate will be lower in country A. B) the inflation rate will be higher in country A. C) real interest rates will be higher in country A. D) nominal interest rates will be lower in country A.
Consider indifference curves for goods X and Y. Suppose we plot the quantity of good Y on the vertical axis and the quantity of good X on the horizontal axis
a. Why are indifference curves downward sloping? b. What is the economic interpretation of the slope of an indifference curve? c. Following what we learned in the Appendix to this chapter, indifference curves would flatten out as someone consumes more of good X and less of good Y. What are we assuming when we draw indifference curves that become flatter?