Question

2. Consider a per on possessing 24 units of time (i.e. hours) which can be allocated into two independent activities, A and B (units of time spent in each activity are goods). Assume that as the person allocates more time to an activity he has a diminishing marginal valuation for time spent in that activity.

(a)   Carefully explain why the assumption of decreasing marginal valuation of time spent in each activity implies that the marginal opportunity cost of additional time spent in each activity increases. (Hint: Remember the 24-unit time constraint).

(b)   Explain why rational behavior implies that the 24 units of time be allocated between the two activities so that the marginal valuation of time in each activity is equated.

Answer 1

Ans) a) Decreasing marginal value states that with each extra unit of consumption, the leve of satisfaction given by that commodity decreases.

Opportunity cost is cost of leaving next best alternative.

Now since you have 24 hrs to do two activities , let us say watching movie and playing game. You might enjoy watching movie for may be 3hr or 4hr or 6hr but as you keep on increasing the time for watching movie, the satisfaction level achieved by watching movie will continuously decrease implying that its marginal utility is continuously decreasing. While you could have got more level of satisfaction by playing outside than watching movie after a certain level of time.

Now since, each extra hour spent on watching movie is giving you decreasing satisfaction and at the same time you are skipping to play outside which will give you more satisfaction, your opportunity cost is increasing.

2) In economics, we consider a consumer to be a rational person i.e. he wants to maximise his satisfaction in limited resources. Given that, a person allocates his resources (in this case time) in such a way that marginal utility received by the commodities (in this case activity) is same. So in this case the person will divide his time between two activities in such a way that marginal utility received by the combination remains same.