Question

Textbook QUESTION 10.5 CHOOSE THE CORRECT ANSWER(S)
Figure 10.6 depicts Marco’s choice of consumption in periods 1 (now) and 2 (later). He has $100 worth of grain in period 1 and no income in period 2. Marco has two choices. In scheme 1, he can store the grain that he does not consume in period 1. This results in a loss of 20% of the grain due to pests and rotting. In scheme 2, he can sell the grain that he does not consume and lend the money at 10%. Based on this information, which of the following statements is correct?
a) With scheme 1, if Marco consumes $68 worth of grain in period 1, he can consume $32 worth of grain in period 2.
b) With scheme 2, if Marco consumes $68 worth of grain in period 1, he can consume $35 worth of grain in period 2.
c) The marginal rate of transformation is higher under scheme 1 than under scheme 2.
d) Marco will always be on a higher indifference curve under scheme 2 than under scheme 1.

Answer 1

The correct option is d.

(a) In scheme 1, if Marco consumes grain worth $68 in period 1, in the next period he would be left with grains less than worth $32 because of the loss in grain due to rotting and pests.

(b) Consumption of grains worth $68 in period 1 will leave the grains left for period 2 lesser than $32 also because of loss due to rotting and pesting.

(c) The marginal rate of transformation is the number of units of one good forgone to get an additional unit of another good. It is not higher under scheme 1 or 2 because Marco doesn't forego units of any good to get additional unit of rice.

(d) Indifference curve is the curve showing combination of two goods offering satisfaction to the consumers. Since scheme 2 will offer more satisfaction to Marco, he will always be on a higher indifference curve under scheme 2.