a.    A price reduction decreases the price of eachunit purchased. “Buy one, get one free” deal only reduces the price of secondunit purchased, reducing the price of the second book to zero. This offer doesnot alter the price of units below one book and above two books. With reference to figure15, in the beginning, the consumer faces a budget line connecting points A andis in equilibrium at point C. Book with a 50% discount (say book A which willcost 25£) is represented by point C. The consumer decides the best outcome isto buy Book A instead of a full priced book of 50£(say book B). Point Drepresents the point at which the consumer buys Book B, however, it isillustrated that the consumer prefers bundle C (Book A) to bundle D (Book B),since it lies on a higher indifference curve.

a.    The clerk may have sensed dis-satisfaction fromthe consumer after having the “buy one get one free” deal rejected. A change inthe price of a good will definitely affect the satisfactory level of theconsumer. Change in price of good will also cause the equilibrium consumptionbundle to change. A reduction in price of good X will cause the budget line toturn counter clockwise. Illustratedfrom the figure above, if the beginning equilibrium is at point A, when thenprice of a book (X) falls to P^1x, the consumersopportunity set expands. With the new opportunity set, the consumer can attaina greater satisfactory level at point B.

This can be seen from the movement ofpoint A to point B into a new equilibrium. GoodX (Books) and Y (Other goods) are known as substitute goods. This implies thatan increase in the price of Books leads to an increase in consumption of othergoods vice versa. Since Books and Other goods are substitutes, a 40% discounton the price of Books (X) will cause the consumer to move from point A to pointB, whereby there are less Y consumed. (Y0 reduced to Y1). Toconclude, this change in price of good, in this case, the 40% discount on anybook, has expanded the consumers opportunity set and increase his satisfactorylevel.

x

Hi!
I'm Erica!

Would you like to get a custom essay? How about receiving a customized one?

Check it out