Question: Suppose Jones and Smith have decided to allocate $1000 per year on liquid refreshment in the form of alcoholic or non-alcoholic drinks. Jones and Smith differ substantially in their preferences for these two forms of refreshment. Jones prefers alcoholic to non-alcoholic drinks while Smith prefers the non-alcoholic option.

a. Draw indifference curves for Jones and a second set for Smith.

b. Discuss why the two sets of curves are different from each other using the concept of Marginal Rate of Substitution.

c. If both Smith and Jones pay the same prices for their refreshments, will their marginal rates of substitution of alcoholic for non-alcoholic drinks be the same or different. Explain