Chapter 4 homework Questions 6, 8, and 16 Managerial Economics & Business Strategy Chapter 4 The Theory of Individual Behavior Normal Good
Income effect (+) Substitution effect (+) Total effect (+) How Draw?? Inferior Good Negative Income effect Substitution effect will always be the same direction no matter what the type of good A decline in the price will lead to more of that good consumed
How draw?? Can we do it?? (number 17) A common marketing tactic among many liquor stores is to offer their clientele quantity (or volume) discounts. For instance, the second-leading brand of wine exported from Chile sells in the US for $8 per bottle if the consumer purchases up to eight bottles. The price of each additional bottle is only $4. If a consumer has $100 to divide between purchasing this brand of wine and other goods, graphically illustrate how this marketing tactic affects the consumers budget line if the price of the other good is $1. Will a consumer ever purchase exactly eight bottles of wine? Explain.
Is this useful?? Y An individuals demand curve is derived from each new equilibrium point found on the indifference curve as the price of good X is varied. II
I $ X P0 P1 D X0 X1 X
Market Demand The market demand curve is the horizontal summation of individual demand curves. It indicates the total quantity all consumers would purchase at each price point. $ 50 Individual Demand Curves $
Market Demand Curve 40 D1 1 2 D2 Q 1 2 3 DM Q
Why do firms use buy one get one free?? Buy one pizza at full price and get a second pizza free Budget line changes after purchase of one pizza Flat (zero slope) for SECOND PIZZA only Then falls normally Allows you to reach a higher indifference curve
Consumer better off Is the firm better off?? Consumers like the firm for doing this repeat business Consumer may buy more pizzas A Classic Marketing Application Other goods (Y)
A buy-one, get-one free pizza deal. A C E D II I 0
0.5 1 2 B F Pizza (X)
Do you want a gift or cash for your birthday?? Cash moves you to a higher indifference curve Expands your possible consumption bundle With cash you can purchase anything from anywhere
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