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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 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).