Determine a person with preferences over two goods, cigarettes and coffee. Both of these goods are addictive, in other words the more coffee you drink, the more willing you are to give up other goods in exchange for coffee and the more cigarettes you smoke, the more willing you are to give up other goods in exchange for cigarettes.
1. Explain what does this addictive behavior imply about the marginal rate of substitution? Is the MRS increasing, diminishing or constant?
2. Draw the indifference curves for this person, with coffee on the vertical axis and cigarettes on the horizontal axis. Include at least two indifference curves and make certain to label the direction in which utility is increasing.
3. Are these indifference curves convex? Would this person prefer an extreme bundle, say 10 cigarettes and no cigarettes no coffee and 10 cups of coffee, or an average of these extremes (for example 5 cigarettes and 5 cups of coffee)?