Explain the four assumptions on which the theory of consumer choice is based. Select one of these assumptions and explain what would happen if this assumption did not hold true
What will be an ideal response?
It is assumed that more is better. If more is not always better, the indifference curves would eventually have a positive slope. A diminishing marginal rate of substitution is assumed. If this assumption did not hold true, indifference curves would not be convex to the origin. Consumers can rank bundles so that they identify one bundle as being preferred to another or that they are indifferent between bundles. The last assumption is one of rationality. If consumers could not rank bundles or if consumers were not rational, it would be impossible to identify the point of utility maximization.
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Suppose there has been an increase in investment. As a result, real GDP will ________ in the short run, and ________ in the long run
A) decrease; increase to its initial level B) increase; increase further C) increase; decrease to its initial value D) decrease; decrease further
How does a reduction in the price level affect the position of the C + I + G + X curve and in turn the equilibrium level of real GDP?
A) The C + I + G + X curve shifts down, thereby reducing the equilibrium level of real GDP. B) The C + I + G + X curve shifts down, thereby increasing the equilibrium level of real GDP. C) The C + I + G + X curve shifts up, thereby reducing the equilibrium level of real GDP. D) The C + I + G + X curve shifts up, thereby increasing the equilibrium level of real GDP.