Author Question: Show that the following preferences are not consistent for a rational individual. i. An ... (Read 65 times)

ss2343 · **on:** Jul 1, 2018

Show that the following preferences are not consistent for a rational individual.

i. An individual when confronted with prices of p1 = 4 and p2 = 8 chooses q1 = 1
and q2 = 5.
ii. The same individual facing prices of p1 = 6 and p2 = 9 chooses q1 = 5 and q2 = 3.

Question 2

If entry is limited due to a limited input, firms in that market earn long run economic profit.

Indicate whether the statement is true or false

bitingbit · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

The first income level was 4 + 40 = 44. The second income was 30 + 27 = 57. However, at the old prices he could have consumed (5,3 ) and paid only 21, so this indicates that he prefers the first bundle. However, he could have consumed the old bundle at the new prices and paid only 20 + 24 =54, which indicates he prefers the second bundle. Thus a contradiction and his preferences are not consistent

Answer to Question 2

False. The price of the limited input will be bid up until zero economic profits result in the market that uses the input.