Question

Get On Question 3: Use indifference curve and constraint analysis to show how Pizza Hut can get customers to spend more money on less pizza than if Pizza Hut charged a uniform price for all pizzas. 1/2 price August 15-21 FOx To begin analysis, divide all consumption into two categories: pizza and "all other goods". Suppose "all other goods" cost $1 per unit. (If it makes analysis simpler for you, divide consumption into pizza and coke, with the price of coke $1 per unit.) Consider a typical customer with $60 income. Consider two alternative potential deals offered by pizza hut Pizzas for sale at $5 for each pizza. Pizzas for sale at $10 for the first pizza, then half that price for any additional pizzas. . Given that information, graph the budget constraints for each potential deal. (Be sure to label the points where the budget constraints intersect the horizontal and the vertical axes.) Then, draw indifference curves so that under the second deal (pizzas for sale at $10 for the first pizza, then half price for any additional pizzas) the consumer chooses less pizza and less of "all other goods" than he would choose under the firs you conclude about t ch pizza). What carn pend on Pizza Page 14 55m

Answer 1

First Deal: let the 'all other goods' quantity key and the quantity of pizza be x. income: M = $60, Price of pizza = $ 5, Price of other goods = $1 Budget constraints: 5x + y = 60 Second deal: Budget constraint: 10 + 5(x-1) + y = 60 if x > 0 y = 60 if x = 0 => 10 + 5x - 5 + y = 600 => 5x + y = 55 if x > 0 y = 60 if x = 0 ABC is the budget name constraint for second deal which is a discontinuous function at = x = 0, y = 55

Hence, one can conclude that by charging uniform price for all pizzas, pizza hut can make consumers spend more as the budget line of the first deal is to the right of the budget line of the second deal