Question

What is the option and why?
S currently spends 10000 rubles a week on entertainment. A rich uncle offers him a choice between a 5000 rubles a week allowance and the opportunity to buy all of his entertainment at half price. S has no kinks in his difference curves. S would

( a)prefer the 5000 rubles allowance

(b )prefer the half-price subsidy

( c)be indifferent between the allowance and the subsidy

(d)prefer the subsidy if entertainment is a normal good and be indifferent otherwise   

( e)prefer the allowance if entertainment is an inferior good and prefer the subsidy otherwise

Answer 1

S currently spends 10000 rubles a week on entertainment. A rich uncle offers him a choice between a 5000 rubles a week allowance and the opportunity to buy all of his entertainment at half price. S has no kinks in his difference curves. S would

(b )prefer the half-price subsidy

S would take an opportunity to buy all his entertainment at a half price and would prefer the half price subsidy due to his prefernces for entertainment.

So, option B is correct.

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