Q1) Assume Jones and Smith have decided to assign $1000 per year to liquid refreshment in form of alcoholic or nonalcoholic drinks. Jones and Smith differ substantially in their preferences for these two forms of refreshment. Jones prefers alcoholic to nonalcoholic drinks, while Smith prefers nonalcoholic version.
1. Sketch a set of indifference curves for Jones, and second set for Smith, with alcoholic drinks on vertical axis and nonalcoholic on the horizontal axis.
2. Using concept of marginal rate of substitution, describe why two sets of curves are different from each other.
3. If both Smith and Jones pay same prices for their refreshments, will their marginal rates of substitution of alcoholic for nonalcoholic drinks be same or different? Describe your answer.