Aisha is considering how to allocate the next 6 hours of her free time. She could choose between leisure (L) and helping her neighbour with the house chores. If she decides to help her neighbour, she is going to get paid at £25 per hour, which she can then spend on her favourite pizza (P). Suppose the price of pizza is £12.50. Aisha’s preferences for leisure and pizza are given by the following utility function: .U(L,P)= 3L + PMU(L)= 3 MU(P)=1Write down Aisha’s budget equation and draw the corresponding budget line. Clearly label the axes and calculate the coordinates of the points of intersection of the budget line with each axis.Calculate Aisha’s marginal rate of substitution between leisure and pizza. Explain the concept of MRS and interpret the figure obtained.Find Aisha’s optimal consumption bundle, both algebraically and graphically. Explain your reasoning.Would Aisha’s optimal choice change if she could get a discount on her pizza purchases so that each pizza would cost £5? Explain.Would Aisha’s optimal choice change (as compared to c), if she could get a discount on her pizza purchases so that each additional pizza beyond the first two, cost £5? (In other words, the first two pizzas need to be purchased at a regular price of £12.50 each, but the third, fourth, etc. can be purchased at a discounted price of £5). Explain.

Budget constraint: given the price of 2 goods and consumer’s income. The budget constraint shows…

Answered: Aisha is considering how to allocate…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter10: Consumer Choice Theory

Section: Chapter Questions

Problem 6P

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Aisha is considering how to allocate the next 6 hours of her free time. She could choose between leisure (L) and helping her neighbour with the house chores. If she decides to help her neighbour, she is going to get paid at £25 per hour, which she can then spend on her favourite pizza (P). Suppose the price of pizza is £12.50. Aisha’s preferences for leisure and pizza are given by the following utility function: .

U(L,P)= 3L + P

MU(L)= 3 MU(P)=1

Write down Aisha’s budget equation and draw the corresponding budget line. Clearly label the axes and calculate the coordinates of the points of intersection of the budget line with each axis.
Calculate Aisha’s marginal rate of substitution between leisure and pizza. Explain the concept of MRS and interpret the figure obtained.
Find Aisha’s optimal consumption bundle, both algebraically and graphically. Explain your reasoning.
Would Aisha’s optimal choice change if she could get a discount on her pizza purchases so that each pizza would cost £5? Explain.
Would Aisha’s optimal choice change (as compared to c), if she could get a discount on her pizza purchases so that each additional pizza beyond the first two, cost £5? (In other words, the first two pizzas need to be purchased at a regular price of £12.50 each, but the third, fourth, etc. can be purchased at a discounted price of £5). Explain.

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