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Consumer Theory (12 Marks) As per the case study, assume that consumers can choose between just two goods: foods that are high in sugar content (Good H – x axis) and foods that are low i

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Question 03 – Consumer Theory (12 Marks)
As per the case study, assume that consumers can choose between just two goods:
foods that are high in sugar content (Good H – x axis) and foods that are low in sugar
content (Good L – y axis). Assume that both goods are normal.
a) Assume that a certain consumer, Pablo, has preferences such that he feels that
Good H and Good L are close (but not perfect) substitutes. What will Pablo’s
indifference curves look like? Show these on a diagram. Briefly explain your
diagram. (You can ...

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Question Preview:

Question 03 – Consumer Theory (12 Marks)
As per the case study, assume that consumers can choose between just two goods:
foods that are high in sugar content (Good H – x axis) and foods that are low in sugar
content (Good L – y axis). Assume that both goods are normal.
a) Assume that a certain consumer, Pablo, has preferences such that he feels that
Good H and Good L are close (but not perfect) substitutes. What will Pablo’s
indifference curves look like? Show these on a diagram. Briefly explain your
diagram. (You can assume an MRS of 1 for perfect substitutes to help you
answer this question).
b) Assume that a certain consumer, Patricia, has preferences such that she feels
that Good L is a ‘good’ whereas Good H is a ‘bad’. What will Patricia’s
indifference curves look like? Shows these on a diagram. Briefly explain your
diagram. (This is a research / thinking question as this was not explicitly
covered in class).

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Solution preview

As stated in the question paper, that X- axis represents the Good H, which contains high sugar. Where Y-axis represent a Good L, which contains low level of sugar, further this two goods are not perfectly substitute but are close substitute, that means the reaction of the substitute product is same, as of for perfect substitute product, but the impact is comparatively lower than the perfect substitute product. Further, in given case we assume that the sugar level factor does not makes much difference (Cowen, 2010). For

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