Using the information in the first picture and the diagram i

EXERCISE 3.4 YOUR MARGINAL RATE OF SUBSTITUTION Imagine that you are offered a job at the end of your university course with a salary per hour (after taxes) of £12.50. Your future employer then says that you will work for 40 hours per week leaving you with 128 hours of free time per week. You tell a friend: \'at that wage, 40 hours is exactly what I would like. 1. Draw a diagram with free time on the horizontal axis and weekly pay on the vertical axis, and plot the combination of hours and the wage corresponding to your job offer, calling it A. Assume you need about 10 hours a day for sleeping and eating, so you may want to draw the horizontal axis with 70 hours at the origin. 2. Now draw an indifference curve so that A represents the hours you would have chosen yourself 3. Now imagine you were offered another job requiring 45 hours of work per week. Use the indifference curve you have drawn to estimate the level of weekly pay that would make you indifferent between this and the original offer. 4. Do the same for another job requiring 35 hours of work per week. What level of weekly pay would make you indifferent between this and the original offer? 5. Use your diagram to estimate your marginal rate of substitution between pay and free time at A

Solution

Marginal rate of substitution = marginal utility from free time/ Marginal utility from weekly pay.

Therfore, MRS = 40/12.5 = 3.2