Graphing the indifference curves for given preferences

Reference no: EM1316336

Suppose Jones and Smith have decided to allocate $1000 per year to liquid refreshment in the form of alcoholic or non-alcoholic drinks. Jones and Smith differ substantially in their preferences for these two forms of refreshment. Jones prefers alcoholic to non-alcoholic drinks, while Smith prefers the non-alcoholic version.

1. Draw a set of indifference curves for Jones, and a second set for Smith, with alcoholic drinks on the vertical axis and non-alcoholic on the horizontal axis.

2. By using the concept of the marginal rate of substitution, explain why the two sets of curves are different from each other.

3. If both Smith and Jones pay the same prices for their refreshments, will their marginal rates of substitution of alcoholic for non-alcoholic drinks be the same or different? Explain your answer.

Reference no: EM1316336

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