give up less and less of the one good in exchange for the other.The MRS is also the slope omes less negative)as you move down along The MRS is constant along a linear indifference curve,since in this case the slope does not change.The consumer is always willing to trade the same number of units of one good in exchange for the other. 6.Explain why an MRS between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction maintain the same evel market is willing to make between the same two goods.The tangency of the indifference curve with the budget line represents the point at which the trade-offs are equal and consumer satisfaction is maximized.If the MRS between two goods is not equal to the ratio of prices. ample,if the slope of the budget line o of the he prices)is consumer can trade 4 units of good 2 for one unit of good 1.If the MRS at the current bundle is-6.then the consumer is willing to trade 6 units of good 2 for one unit of good 1.Since the two slopes are not equal the consumer is not maximizing her satisfaction.The consumer is willing to trade 6 butonly has to trade 4 so she should make the trade This trading continues mtil is achieved. As trades are made,the MRS will change 7.Describe the indifference curves associated with two goods that are perfect substitutes. What if they are perfect complements? Two goods are perfect substitutes if the MRS of one for another is a constant number Given the MRS is a constant number,the slope of the indifference curves will be constant, and the indifference curves are therefore linear.If two goods are perfect complements,the curves are Lshaped.In this case the consumer wa nts to sume the two goods in a fixed proportion,say one unit of good I for every I unit of good 2 If she has more of one good but not more of the other then she does not get any extrasatisfaction. 8.What is the difference between ordinal utility and cardinal utility?Explain why the assumption of cardinal utility is not needed in order to rank consumer choices Ordinal utility implies an ordering among alternatives without regard for intensity of preference For exampl,if the consumer's first choice is preferred to their second choie then utility from the first choice will be higher than utility from the second choice.How much higher is not important.An ordinal utility function generates a ranking of bundles and no meaning is given to the utility number itself Cardinal utility implies that the intensity of preferenes may be quantified,and that the utility number itself has meaning An ordinal ranking is all that is needed to rank consumer choices.It is not necessary know how intensely a consumer prefers basket Aover basket B:it is enough to know that A is preferred to B.give up less and less of the one good in exchange for the other. The MRS is also the slope of the indifference curve, which increases (becomes less negative) as you move down along the indifference curve. The MRS is constant along a linear indifference curve, since in this case the slope does not change. The consumer is always willing to trade the same number of units of one good in exchange for the other. 6. Explain why an MRS between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction. The MRS describes the rate at which the consumer is willing to trade one good for another to maintain the same level of satisfaction. The ratio of prices describes the trade-off that the market is willing to make between the same two goods. The tangency of the indifference curve with the budget line represents the point at which the trade-offs are equal and consumer satisfaction is maximized. If the MRS between two goods is not equal to the ratio of prices, then the consumer could trade one good for another at market prices to obtain higher levels of satisfaction. For example, if the slope of the budget line (the ratio of the prices) is –4 then the consumer can trade 4 units of good 2 for one unit of good 1. If the MRS at the current bundle is –6, then the consumer is willing to trade 6 units of good 2 for one unit of good 1. Since the two slopes are not equal the consumer is not maximizing her satisfaction. The consumer is willing to trade 6 but only has to trade 4, so she should make the trade. This trading continues until the highest level of satisfaction is achieved. As trades are made, the MRS will change and become equal to the price ratio. 7. Describe the indifference curves associated with two goods that are perfect substitutes. What if they are perfect complements? Two goods are perfect substitutes if the MRS of one for another is a constant number. Given the MRS is a constant number, the slope of the indifference curves will be constant, and the indifference curves are therefore linear. If two goods are perfect complements, the indifference curves are L-shaped. In this case the consumer wants to consume the two goods in a fixed proportion, say one unit of good 1 for every 1 unit of good 2. If she has more of one good but not more of the other then she does not get any extra satisfaction. 8. What is the difference between ordinal utility and cardinal utility? Explain why the assumption of cardinal utility is not needed in order to rank consumer choices. Ordinal utility implies an ordering among alternatives without regard for intensity of preference. For example, if the consumer’s first choice is preferred to their second choice, then utility from the first choice will be higher than utility from the second choice. How much higher is not important. An ordinal utility function generates a ranking of bundles and no meaning is given to the utility number itself. Cardinal utility implies that the intensity of preferences may be quantified, and that the utility number itself has meaning. An ordinal ranking is all that is needed to rank consumer choices. It is not necessary to know how intensely a consumer prefers basket A over basket B; it is enough to know that A is preferred to B