Question

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

Answer 1

a) Given they each like both goods and they will each choose to consume positive quantities of both goods, we can assume their indifference curves have the normal convex shape. However since Jones has an overall preference for hockey and Smith has an overall preference for rock concerts, their two sets of indifference curves will have different slopes. Suppose that we place rock concerts on the vertical axis and hockey games on the horizontal axis, Jones will have a larger MRS than Smith. Jones is willing to give up more rock concerts in exchange for a hockey game since he prefers hockey games. Thus, indifference curves for Jones will be steeper than the indifference curves for Smith.

b) At any combination of hockey games and rock concerts, Jones is willing to give up more rock concerts for an additional hockey game, whereas Smith is willing to give up fewer rock concerts for an additional hockey game. Since the MRS is a measure of how many of one good (rock concerts) an individual is willing to give up for an additional unit of the other good (hockey games), the MRS, and hence the slope of the indifference curves, will be different for the two individuals.