Question

4 a) Draw the indifference curves for nickels and dimes. Would they ever have a non-constant slope? Explain.

b) Joe subscribes to an Internet provider that charges $2 per hour. Draw his budget line for Internet access on the horizontal axis and money spent on all other goods on the vertical axis assuming he has $100 per month to spend. Another company offers unlimited Internet access for a flat monthly fee of $20. Draw this budget line.

Answer 1

4. (a) The indifference curve for nickels and dimes would be as below.

The indifference curve is given for three amounts as stated. They would never have a non-constant slope. The reason being that they have constant monetary values, no matter how much they are to be acquired. For example, at U=$1, there would be either 20 nickel or 10 dimes, or some rate of 2:1 ratio of nickel and dimes would make it. To make $1, suppose we have 10 dimes. If we reduce 1 dime, we have to add 2 nickels to still make $1, and further on. The ratio 2:1 would be constant, and this is the reason they would have the indifference curve like perfect substitute.

(b) The price of internet (good x) is $2/hour. Supposing the money spent on other good is y, the price of y would be $1, as py=$1*y is the expenditure. The budget constraint in this case would be . If Joe chooses to pay $20 a month for unlimited x, his income would be reduced to $80, and the budget constraint would be (the second option is basically a point, not a line, is chosen if Joe chooses no internet). Both the budget constraint are as below.