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indifference theory, budget line and rational choices

Supposedly, indifference theory can explain all rational choices and behavior. Try the theory out on this situation. Suppose the only consideration for couples to have a baby or not was money. If a baby costs $5,000 a year, the price of "All other goods" is $1, and the couple has an annual income of $40,000:

a.Construct the budget line for having a family.

b.suppose the Smiths plan to have 3 children while the Jones decide against having any children at all. Draw the indifference maps and budget lines consistent with these decisions. (Hint: this question is easier if you have one graph for the Smiths and one for the Jones.

c.For the Smiths, derive the trade off (marginal rate of substitution) between children and all other goods they could consume?

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See the attached file. The graph and tables may not print here. Thanks

Supposedly, indifference theory can explain all rational choices and behavior ...try the theory out on this situation. Suppose the only consideration for couples to have a baby or not was money. If a baby costs $5,000 a year, the price of ...

Solution Summary

This post shows how to construct a budget line and make rational choices between products. Concepts such as marginal rate of substitution, trade off, etc. are covered.

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