Refer to Figures d and e.Bundle A is preferred to bundle B in Figure e and not in Figure d because:
A) the MRS between water in a rainy season and during a drought is higher in e than in d.
B) as the probability of a drought increases, consumers are no longer indifferent between the two bundles.
C) as the probability of a drought decreases, water in a rainy season becomes less valuable.
D) consumers are indifferent between bundles A and B as the probability of a drought increases.

Question

Refer to Figures d and e.Bundle A is preferred to bundle B in Figure e and not in Figure d because: 
A) the MRS between water in a rainy season and during a drought is higher in e than in d. 
B) as the probability of a drought increases, consumers are no longer indifferent between the two bundles. 
C) as the probability of a drought decreases, water in a rainy season becomes less valuable. 
D) consumers are indifferent between bundles A and B as the probability of a drought increases.

Quizplus · Accepted Answer

In Figure e, the MRS between water in a rainy season and during a drought is lower than in Figure d. However, as the probability of a drought increases, consumers become less willing to substitute water in a rainy season for water during a drought. This leads to a higher marginal rate of substitution between the two types of water, making bundle A more preferred than bundle B.

Refer to Figures D and E