ECONOMICS

Economics

Economics

Miriam is a fairly typical consumer. After her essential spending (on food, housing, etc.), Miriam has £ 400 to spend on her holiday in 2012; and another £ 400 to spend in 2013. She can go on holiday in September 2012 or in September 2013. Miriam can save some or all of her holiday money for 2012, and spend it in 2013; she will then receive 30% interest per year on her savings. Alternatively, Miriam can borrow money in 2012, and pay it back in 2013 - she will then need to pay 30% interest, from 2012 to 2013.

Answer: Part (A)

The budget line graph that presents the holiday spending of 2012 as well as 2013 is presented on the next page.

The graph above representing the budget line for Miriam is generated on based on the information presented in the table below:

Combinations

A

B

C

D

E

F

G

H

I

J

Holiday in 2012

-£ 23

£ 15

£ 54

£ 92

£ 131

£ 169

£ 208

£ 246

£ 285

£ 323

Holiday in 2013

£ 950

£ 900

£ 850

£ 800

£ 750

£ 700

£ 650

£ 600

£ 550

£ 500

Combinations

K

L

M

N

O

P

Q

R

S

T

Holiday in 2012

£ 362

£ 400

£ 438

£ 477

£ 515

£ 554

£ 592

£ 631

£ 669

£ 708

Holiday in 2013

£ 450

£ 400

£ 350

£ 300

£ 250

£ 200

£ 150

£ 100

£ 50

£ 0

The point of where Miriam does not save or borrow any money is indicated by the 'red dot'. It is the point where Miriam can go to holiday in both the years that is 2012 and 2013 with a budget of £ 400 in each of the holiday.

The budget line is a frontier showing what Miriam can attain. The budget line limits choices; it is due to scarcity. Spending money on a product means that money cannot be used to purchase another product. In the above case, Miriam can either go on holiday in September 2012 or in September 2013. Miriam can save some or all of her holiday money for 2012, and spend it in 2013; she will then receive 30% interest per year on her savings. Or, Miriam can borrow money in 2012, and pay it back in 2013 she will then need to pay 30% interest, from 2012 to 2013. Answer Part (B)

Miriam's indifference curve is given by Y = 162769.2 / X

Where, X is the amount she spends on holidays in 2012, and

Y the amount she spends on holidays in 2013.

The graph of Miriam's indifference curve, on the basis of the equation provided, is generated based on the information in the table below:

Combinations

A

B

C

D

E

F

G

X

£ 50

£ 100

£ 150

£ 200

£ 250

£ 300

£ 350

Y

£ 3256

£ 1628

£ 1085

£ 814

£ 651

£ 543

£ 465

Combinations

H

I

J

K

L

M

N

X

£ 400

£ 450

£ 500

£ 550

£ 600

£ 650

£ 700

Y

£ 407

£ 362

£ 326

£ 296

£ 271

£ 250

£ 233

The indifference curve graph is presented in the next page.

In order to merge this indifference curve with that of the budget line graph, it is essential that the coordinates of the two graphs be matched. This is done as represented in the information provided in the table below:

Combinations

A

B

C

D

E

F

G

H

Holiday in 2012

£ 0

£ 50

£ 100

£ 150

£ 200

£ 250

£ 300

£ 350

Holiday in 2013

£ 920

£ 855

£ 790

£ 725

£ 660

£ 595

£ 530

£ 465

Indifference Curve

£ 3256

£ 1628

£ 1085

£ 814

£ ...