Chapter 5

Question 1

Optimal Choice

Answer 1

the bundle of goods that is associated with the highest indifference curve that just touches the budget line is labeled (x∗1,x∗2).

Question 2

Kinky tastes

Answer 2

Is an optimal consumption bundle where the indifference curve doesn’t have a tangent

Question 3

Boundary Optimum

Answer 3

The optimal consumption involves consuming zero units of good 2. The indifference curve is not tan- gent to the budget line.

Question 4

Demanded bundle

Answer 4

The optimal choice of goods 1 and 2 at some set of prices and income

Question 5

Demand function

Answer 5

is the function that relates the optimal choice—the quantities demanded—to the different values of prices and incomes

Question 6

Optimal choice with perfect substitutes

Answer 6

If the goods are perfect substitutes, the optimal choice will usually be on the boundary.

Question 7

Optimal choice with perfect complements

Answer 7

If the goods are perfect complements, the quantities demanded will always lie on the diagonal since the optimal choice occurs where x1 equals X2.

Question 8

Optimal choice with concave preferences.

Answer 8

The optimal choice is the boundary point, Z, not the interior tangency point, X, because Z lies on a higher indifference curve.