Answer to Question #108515 in Economics of Enterprise for paradise

Question

2. Suppose that Jones and Smith have each decided to allocate $1000 per year to an entertainment budget in the form of hockey games or rock concerts. They both like hockey games and rock concerts and will choose to consume positive quantities of both goods. However, they differ substantially in their preferences for these two forms of entertainment. Jones prefers hockey games to rock concerts, while Smith prefers rock concerts to hockey games.
a. Draw a set of indifference curves for Jones and a second set for Smith.
b. Using the concept of marginal rate of substitution, explain why the two sets of curves are different from each other

Answer 1

a)

For Jones:

For Smith:

b) Marginal rate of substitution (MRS) shows how many units of one good a consumer must refuse in order to acquire an additional unit of another good. In other words, this is the ratio of marginal utility of two goods.

The marginal rate of substitution is the norm according to which one good can be replaced by another without gain or loss to satisfy the consumer.

The values ​​of the marginal rate of substitution are always negative, since an increase in the number of acquired units of one good implies a decrease in the consumption of another, there are different signs. Since the indifference curve is convex down to the origin, the marginal rate of substitution most often decreases as the consumption of one good instead of another increases. This phenomenon is called a decreasing marginal rate of substitution.

According to the conditions of the problem, consumers have different preferences, that is, the marginal rate of substitution will be different. This leads to a different kind of indifference curves.