Chapter EMD, Problem 3CYU

a)

To determine

Another consumption bundle that offers the same total utility as the current bundle has, the person who is less willing to trade games for books, and graphs for their indifference curves at their current consumption bundles.

Explanation of Solution

When L has a marginal rate of substitution of books for games of 2 and K has a marginal rate of substitution of books for games of 5, then, L would be equally content with a bundle of 2 books and 5 games and K would be equally content with a bundle of 5 books and 2 games in this case.

K is less willing to trade games for books as K preferred books over games.

The graph will represent the following indifference curves at their current consumption bundles:

  

The slope of the indifference curve for new consumptions of bundles is lower than the previous one as the new substitute of books’ and games’ consumption declined from 3 to 2 and 6 to 5 respectively. The green indifference curve shows the previous consumption of games and books by K and L where both of them consumed 3 books and 6 video games. The orange indifference curve represents the new indifference curve which involves the ratio of 2 and 5.

Economics Concept Introduction

Introduction: A graphical representation of a combination of products that offers a consumer a particular similar level of satisfaction and renders them indifferent is called an indifference curve.

b)

To determine

The relative prices of books in terms of games at which L’s current bundle is optimal, whether K’s bundle optimal given this relative price.

Explanation of Solution

The relative price of books would be more than the price of video games as the quantity which is consumed by both K and L is more for video games and less for books. It shows that the relative price of video games is lower than the price of books.

Yes, K’s bundle optimal provides that relative price as the optimal consumption is 5 books and 2 games that are consumed by K.

Economics Concept Introduction

Introduction: A graphical representation of a combination of products that offers a consumer a particular similar level of satisfaction and renders them indifferent is called an indifference curve.