Question

1.

Consider the following combinations of leisure and consumption:

A: $6,000 consumption and 3 days of leisure

B: $4,000 consumption and 5 days of leisure

C: $12,000 consumption and 7 days of leisure

Suppose that points A and B are on the same indifference curve, but C is on a different indifference curve.

Which of the following consumption bundles is definitely NOT on the same indifference curve as point C. [Hint, plotting combinations above may be helpful]

Select one:

a. $3,000 consumption and 4 days of leisure

b. $2, 000 consumption and 10 days of leisure

c. $1 consumption and 30 days of leisure

d. $24,000 consumption and 1 day of leisure

2.

John has convex indifference curves and has a time endowment of 16 hour in each day. John's has a flexible work schedule and can decide how long he wants to work each day for a wage of $10 an hour. John has no outside income. Which of the three consumption leisure combinations will John prefer [based on the properties of indifference curves we have discussed].

Select one:

a. $0 of consumption and 16 hours of leisure

b. $160 of consumption and 0 hours of leisure

c. $80 of consumption and 8 hours of leisure

Answer 1

1)

It is given that Point At point C there is $12000 of consumption and 7 days of leisure. Indifference curve shows points at which a consumers have same level of utility.

Now in option (a) there is $3,000 consumption and 4 days of leisure, this means at point C he has more of both leisure and consumption. This means at point C he has higher utility and thus cannot be on same indifference curve.

Hence option (a) is the correct answer.

(Note : In remaining options either he is getting higher consumption or he is enjoying more leisure and thus can be on same IC as Point C.)

Hence the correct answer is (a) $3,000 consumption and 4 days of leisure

2)

Convex Indifference curves means that he prefers average over extreme.

Here option (a) is 0 consumption and 16 hours of leisure. This means that it is extreme point. Similarly, In option (b) there is 160 consumption and 0 hours of leisure. This means that it is also an extreme point.

In Option C, he is getting $80 consumption(= (0 + 160)/2)) and 8 hours of leisure(= (16 + 0)/2)) and thus is an average of both a and b.

As discussed above that average is preferred over extremes when Preference is convex.

Hence the correct answer is (c) $80 of consumption and 8 hours of leisure.