Answer to Question #275784 in Microeconomics for Malde

Question

Sanjana loves to read books(B) and likes to watch movies(M) as well. She derives double the satisfaction from reading a book than watching a movie. Her utility function is as follows

U(B, M) = 2B + M

Where B and M are the number of books and movies respectively.

a. Explain the shape of the indifference curve using diagrams. [ Word limit: 200]

b. The income available with her is INR60. And price of movie ticket is INR 10 and that of a book is INR 15. Will she spend her entire budget and why? What will be her consumption, explain why? [Word limit: 300] 

Answer 1

a. Since books and movies are perfect isabstitutes, the the indifference curve is a linear downwarding sloping. Besides, from the utility function, Sanajana's preference for books is twice as her her preference for movies. therefore the slope of the indifference curve is is -2.

b. $Marginal rate of sabstitution (MRS) = \frac{MUB}{MUM} = 2$

$Slope of the budget line=\frac{15}{10} = 1.5$

$MRS> Slope of thebudget line$

Therefore she will only consume books

$Units of books consumed=\frac{60}{15}= 4 books$