Question

You like to rent movies to watch in the evening. If rentals become cheaper, you will rent more movies, but only up to a maximum of 7 per week – at which point you are watching a movie every evening.  Draw a plausible budget line and indifference map, and use this graph to show the effect on movie rentals of lower and lower prices for renting movies.

Answer 1

As price of renting a movie decreases, budget line changes it's slope, if earlier he could rent x movies then now he can rent 7 movies per week. ( If consider the maximum case). Due to the change in budget line, the person now has moved to higher indifference curve. His utility shifts from IC₁ to IC₂. This shift to higher indifference curve and change in slope of budget line shows the effect effect on lower and lower prices of renting movies.

Also, A is the point where the person watch movie every evening. It is the equilibrium point. Equilibrium point is the point where budget line meets indifference curve.

Note: by lowering rent price on movies, the slope of budget line will change until it reaches the maximum of 7. I.e. you can draw many lines between the original and new budget line depending upon by how much the rent increases.