Explore BrainMass
Share

indifference theory, budget line and rational choices

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

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?

© BrainMass Inc. brainmass.com October 16, 2018, 10:02 pm ad1c9bdddf
https://brainmass.com/economics/personal-finance-savings/indifference-theory-budget-line-rational-choices-206045

Solution Preview

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.

$2.19
Similar Posting

Demand and supply, indifference curve analysis, cost function

1. Use any figures for prices and quantities to calculate and analyze the arc elasticity of demand relative to price for a product, and extend the analysis to showi ts implications on a product decision.

2. Using fully explained indifference curve analysis, derive a demand curve for a product. As part of your answer, explain verbally and show mathematically that consumer equilibrium in the ordinal and cardinal approaches to consumer equilibrium are equivalent.

3. If a firm enjoys economies of scale up to a certain output level, and cost then increases proportionately with ouput, what can you say about the shape of long-run average cost curves. Illustrate graphically the shape of this LRAC curve, and explain what kind of firm is likely to have this type of LRAC (a small firm with more labor and less capital or a large firm with more capital and less labor).

View Full Posting Details