Question

Janelle and Brian each plan to spend $20,000 on the styling and gas mileage features of a new car. They can each choose all styling, all gas mileage, or some combination of the two. Janelle does not care at all about styling and wants the best gas mileage possible. Brian likes both equally and wants to spend an equal amount on each. Using indifference curves and budget lines, illustrate the choice that each person will make.

Short answer

Janelle’s preference for car features will give a corner solution where she spends whole $20,000 on gas mileage.

Brian’s equal preference for both the features will divide the amount so that $10,000 is spent on gas mileage and another $10,000 on styling.

Step-by-step solution

Janelle’s preference and indifference curve

When a consumer consumes zero amount of a good and spends all their income on other goods such that indifference curves cut one of the axes, such preference is called corner solution.

Janelle’s total expense is $20,000. Janelle wants the best gas mileage and spends $20,000 for this feature. Since the other feature, styling, is not availed by the consumer, the scenario gives a corner solution.

Janelle’s indifference curve cuts the y-axis showing the amount spent on gas mileage.

Step 2:Brian’s preference and indifference curve

Brian prefers both the features, gas mileage, and styling equally; he will spend half of the amount on each feature. The indifference curve for Brian is shown below, where the indifference curve is tangential to the budget line precisely at the center at point A.

Point A at the center of the budget line signifies that Brian has an equal preference for gas mileage and styling.