Question

- Use separate diagrams of your choice to illustrate and answer the following:

a) Can a given consumer have more than one indifference curve when deciding between (say) free time and working? If so, can those indifference curves cross at any point? Why or why not? Why are the indifference curves convex?

b) Is the concept of Nash equilibrium useful when we have a dominant strategy equilibrium? Why/why not? Is the concept of Nash equilibrium useful to predict outcomes of complex strategic interactions (like for example the outcome of the ongoing Brexit negotiations), when we have more than one Nash equilibria? Why? Why not?

c) Should policy makers introduce a new tax to combat a ‘bad’ behaviour (like for example trying to combat obesity by introducing a sugar tax) or instead use some form of ‘nudging’? If so, how? If not, why not? Provide a real-life examples (other than the sugar tax mentioned above) when making your case.

Answer 1

a) NO, a given consumer cannot have more than one indifference curve. A consumer has total 24 hours in a day to allocate time between free and working hour. A consumer has a specified preference structure at a given point of time. If the consumer has to choose between free time and working, the combination of time changes only and that person remains on the same indifference curve.

Two indifferences can never intersect each other as the point at the intersection point lies on both indifference curves, which is contradictory with the characteristics of indifference curve. Any point on high indifference curve always give higher utility. However, if a point simultaneously lies on higher and lower indifference curve then different utility levels do not hold here and causes violation of assumption. Hence, two indifference curves cannot intersect for a individual. If working conditions and facilities change due to change in economic conditions, then the indifference curve can shift entirely upward or downward.

The indifference curves are convex because, the individual has total 24 hours and total allocation of hours is divided between free time and working. There is a trade off between these two choices. If the individual wishes to increase working hour, free time will decrease and vice versa. The trade off is called marginal rate of substitution between working and free time. MRS between two choices are diminishing. The rate of substitution falls eventually as the individual moves rightward along the horinzontal axis or downward along the indifference curve. Willingness to substitute free hour for working hour decreases as the person moves down along the indifference curve.