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Suppose that Steve and Jill, a married couple, have decided to allocate $2,500 per year to their "dinner out" budget which will be used to eat at two types of restaurants: i) high-end, fancy restaurants and ii) typical national chain (and less expensive) restaurants such as Fridays, Roadhouse, and Applebee's. Both Steve and Jill have agreed to spend some money on each type of restaurant. However, the two differ substantially in their preferences. Steve is not much of the staunch atmosphere at the high-class restaurants, but thoroughly enjoys the laid-back atmosphere of the Fridays-like restaurants. Jill loves the unique cuisine offered by the high-end restaurants, but finds it difficult to find suitable food on the menu at the chain restaurants.
a) Draw a set of indifference curves representing Steve's preferences (place dinner at national chain restaurants on the X-axis and dinner at high-end restaurants on the Y-axis). On a separate graph, draw a set of indifference curves representing Jill's preferences. (Hint: the slopes will be different.)
b) Using the concept of marginal rate of substitution (MRS), explain why the two sets of indifference curves look different from each other. (Hint: the two indifference curves will have different slopes for any given value on the X-axis.)
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