Question

. Dwight’s preferences over beer and whiskey satisfy “more is better,” but are concave (thus violating the usual assumption of convexity).

a. On a diagram, sketch what such indifference curves would look like.

b. Do Dwight’s preferences exhibit decreasing, constant, or increasing MRS? Explain.

c. Sketch the shape of Dwight’s demand curve for beer. Hint: It may help to start by adding a budget constraint to your diagram from part (a) and think about how he would react to changes in the price of beer.

Answer 1