Answer to Question #275842 in Microeconomics for Sanjali

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. [3 MARKS, 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?

Answer 1

(a)

Here we have Sanajanas preferences to be linear in both B and M and therefore we have straight line downward sloping indifference curve which exhibits perfect substitute preference.

(b)

Now here,

$MRS=\frac{MU_B}{MU_M}=2$

$\therefore$ slope of the budget line is:

$=\frac{15}{10}=1.5$

$\therefore$ $MRS>\frac{P_B}{P_M}$

And so, only books will be consumed i.e.

$B^*=\frac{60}{15}=4units$ and

$M^*=0units.$ i.e. movies will not be consumed.