Marginal rate of substitution between visiting gym-consuming

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Hulk goes to the gym 20 times a month. His income is $1000 per month and his visits to the gym cost $4 per visit. For simplicity, assume all other goods that Hulk consumes besides the gym costs $10 each. Assume Hulk exhibits diminishing marginal rate of substitution between visiting the gym and consuming all other goods.

a. Draw Hulk’s budget line for visits to the gym (horizontal axis) and all other goods (vertical axis). Show the values for the x and y axis and for the consumption bundle on the budget line that maximizes Hulk’s satisfaction and draw an indifference curve through that point.

b. Suppose the gym has a membership option of a flat fee of $60 per month and the cost for members is $1 per visit instead of $4 for non-members. Draw Hulk’s budget line if he were to join this new club. What would the new consumption bundle consist of? Would Hulk join the membership? Explain why.

Reference no: EM131002351

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