Question

Suppose you get rid of your old gas-guzzling car and buy a new fuel-efficient car. Driving is now cheaper, but on the other hand you have to make monthly car payments. You find that, on balance you are exactly as happy as before (i.e. you get the same total utility and hence are on the same indifference curve). Illustrate this situation using indifference curves between “car rides” and “all other goods.” Are you now driving more or less than you were before?

Answer 1

• Here, inefficient car has been replaced by the efficient ones. Thus, it leads to the more rides due to cheapness but on other hand, monthly car payments are also made which increases disutility of rider.

Following is diagram of indifference curve:

above indifference curve shows that after switching to efficient car, now more rides are being taken. but side by side consumption of other goods is reduced. we moves towards right in indifference curve. Hence, there is no change in total utility.