The composite-good convention allows indifference curve analysis to analyze preferences for one good against many other goods as long as:
A)all the goods belong to the same category.
B)the prices of the other goods is kept constant.
C)all the other goods are normal goods.
D)income levels of consumers remain unchanged.

Question

Quizplus · Accepted Answer

By keeping the prices of other goods constant, the composite-good convention allows us to analyze the preferences for one good against many other goods without the need to explicitly model the demand for those other goods. This is because the effect of changes in the price of those other goods is captured in the income effect, which is already accounted for in the analysis.

The Composite-Good Convention Allows Indifference Curve Analysis to Analyze Preferences