Question 6 (Preferences). Suppose x1 is a "good" and good x2 is a "bad". That is, the consumer is better off with more units of x1, but worse off with more units of x2.

a) Draw several indifference curves that can represent these two goods (put "good" on horizontal axis and "bad" on vertical axis). Label the axes and indifference curves.

b) Now suppose x1 is a neutral good, and x2 is a regular good. In other words, the consumer is indifferent between different levels of consumption of x1, while the consumer is better off the more x2 he consumes. Draw several indifference curves that represent these two goods (put "good" on vertical axis and "neutral" on horizontal axis). Label the axes and indifference curves. Page 5

c) What is the Marginal Rate of Substitution (MRS) of the indifference curves in part b)?

d) How would the MRS change if x2were the neutral good and x1 were the regular good?