Suppose the happiness or utility that a person receives from any combination of

Question

Suppose the happiness or utility that a person receives from any combination of income (Y) and leisure (H) is simply the product of the amount of each good "consumed." More formally we can write this type of preferences as U = YH. Find the values of Y for points A, B, C. and D in the table below. Sketch this individual's indifference curve for U = 1000 and label it U_1. Repeat this process for a second indifference curve, U_0 = 784 Calculate a linear approximation of the slope of the indifference curve between points A and B, between B and C. and between C and D. Since this indifference curve is not a straight line and the slopes calculated in part (c) were for straight lines, they were only approximately correct However, it can be shown that the slope an any indifference curve for this utility function at any point is MRS = -Y/H Use this formula to find the MRS at points A, B, C, and D.

Explanation / Answer

ans a)

B)

For U0= 784

c)

MRS= change in Y /change in H

D)

point H Y U A 8 125 1000 B 10 100 1000 C 12.5 80 1000 D 20 50 1000

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