Question

Joan and Andrew are concerned that their daughter, Fiona spends too much time on playing online games. In an attempt to limit Fiona’s online time, they charge Fiona a user fee of $0.50 per hour. At this user fee, Fiona spends $10 on online games out of her $20 weekly allowance. It is assumed that Fiona’s preferences over online games and composite goods are characterised by a convex indifference curve.

a) Draw an indifference curve diagram to illustrate the situation described above. Show clearly Fiona’s optimal bundle.

Suppose that, at the user fee of $0.50 per hour, Fiona still spends too much time online than they would like, but they do not want simply to raise the fee further. So, they are considering the following arrangement: the fee will be raised to $1.00 per hour and the weekly allowance will be increased by $M so as to keep Fiona’s utility to be unchanged.

b) Under this arrangement, will Fiona spend less time online than before? By using the diagram you drew in a), explain your answer.

c) Will the additional revenue from the higher user fee be enough to cover the increase in Fiona’s weekly allowance? By using the diagram you drew above, explain your answer.

Answer 1