Question

4.1. Suppose you have two distinct bundles X and Y, and, for you, X is strictly better than Y. Explain briefly using a graph and words why the two indifference curves associated to two bundles X and Y I(X) and I(Y) cannot cross each other. 4.2. Explain using a graph and words why if the assumption of monotonic preferences (aka "more-is- better") implies that indifference curves are not thick and they must be downward sloped. 4.3. Provide three examples of goods that are typically regarded as perfect substitutes. Explain briefly. 4.4. Provide three examples of goods that are typically regarded as perfect complements. Explain briefly.

Answer 1

4.1) There are two distinct bundles X and Y, for a person X is strictly better than Y. As shown in figure 1. bundle X and Z on same indifference curve (ICI), which means both bundles will provide same utility. On the other hand, X is strictly better than Y, bundle X will provide more utility to an individual than bundle Y. According to transitivity, bundle Z should better than Bundle Y But Bundle Z and bundle Y is on same indifference curve, thus, provide same utility. Thus, both the statements contradictory to each other. U(X) > U(Y)=U(Z) U(X)=U(Z)>(U(Y) Good Y IC Z X IC Good X Figure 1

4.2 An indifference curve depicts the combinations of two goods that provide same level of utility. Indifference curve can't be thick because it violates the assumption. As shown in figure 2. Point 2 has more of good X as compare to point 1 but since they are on same indifference curve both of them should provide same utility. As the assumption state "more is better "point 2 should prefer over point 1, which contradict the previous statement that they both are equal. Good Y IC X1 X2 Good X Figure 2 As shown in figure 2, to get the same utility from combination A and combination B, the consumption of good Y decreases in order to increase the consumption of good X.

Good Y IC X X2 Good X Figure 3 Therefore, the movement from A to B explains the reason for indifference curve to be downward sloping from left to right. 4.3) Substitute goods are those goods that can be used for one another. For instance: Coke and Pepsi Shoes of Nike and Adidas Coffee of Bru and Nescafe 4.4) Complementary goods are those goods which are used as paired good. Car and petrol Bat and ball Toothbrush and toothpaste