Oswald Odd consumes only goods 1 and 2. His utility function is U(x₁, x₂) = x₁ + x₂ + min{x₁, x₂}. Each of Oswald's indifference curves is A) L-shaped. B) made up of three line segments with slopes -2, -1, and -. C) made up of two line segments with slopes -2 and -. D) is smooth and has no kinks. E) is a diamond-shaped figure consisting of four line segments.

Question

Quizplus · Accepted Answer

The utility function given implies that Oswald has a preference for consuming both goods, but is subject to diminishing marginal utility for each additional unit consumed. This results in a downward sloping indifference curve. However, the presence of the minimum function also implies that the indifference curve takes a kinked shape. Specifically, as the consumer moves along the curve and increases consumption of one good, there is no change in utility until the consumption of the other good also increases by the same amount, resulting in the angle at the kink. Thus, the indifference curve is made up of two line segments with slopes -2 and -. A diamond-shaped curve would imply perfect substitutes, and three-line segments with specific slopes are not necessary to accurately represent the kinked shape of the curve.

Oswald Odd Consumes Only Goods 1 and 2