Question

Q1. 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 Sanajana's 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 $MRS = \frac{MUB}{MUM} = 2$

And slope of budget line is $\frac{15}{10} = 1.5$

MRS> PB/PM

And so only books will be consumed that is, B*= $\frac{60}{15} = 4$ units and M*= 0 unit's that is movies will not be consumed