Consider the following three market baskets: If baskets A and B are on the same indifference curve and if indifference curves exhibit diminishing MRS:
A)C is preferred to both A and B.
B)A and B are both preferred to C.
C)C is on the same indifference curve as A and B.
D)There is not enough information to determine preferences for C relative to the other goods.

Question

Consider the following three market baskets:  If baskets A and B are on the same indifference curve and if indifference curves exhibit diminishing MRS:
A)C is preferred to both A and B. 
B)A and B are both preferred to C. 
C)C is on the same indifference curve as A and B. 
D)There is not enough information to determine preferences for C relative to the other goods.

Quizplus · Accepted Answer

Since A and B are on the same indifference curve, they provide the same level of satisfaction to the consumer. However, since indifference curves exhibit diminishing MRS, adding more of one good and less of the other will eventually lead to a point where the consumer prefers the new basket to the original. In this case, basket C has less of e and more of b compared to basket A, which means that the MRS of e for b is lower in C than in A. Therefore, the consumer would prefer basket C to A. Similarly, basket C has more of e and less of b compared to basket B, which means that the MRS of e for b is higher in C than in B. Therefore, the consumer would prefer basket C to B. Hence, C is preferred to both A and B.

Consider the Following Three Market Baskets: If Baskets a and B