Question

A recent coupon offer by a leading grocery chain offered its customers $20 off

their grocery bill if they spent at least $180 in one store visit. Please draw a

customer’s original budget line and new budget line.

Answer 1

Horizontal axis represents grocery and vertical axis represents other items.

The original budget line is BO; if there is no choice of other item, X items of grocery could be purchased; similarly, if the consumer opts for only other items, Y quantity of other items could be purchased. Any point on this line indicates a combination of purchase between these two items.

Now, there is a discount of $20 in every $180 grocery purchase. The amount of $20 becomes the income of that consumer, which could be spent on either grocery or other items or a combination of these two. It improves the budget line by a parallel shift to the rightward as BN. if there is no choice of other item, X+ items of grocery could be purchased; similarly, if the consumer opts for only other items, Y+ quantity of other items could be purchased. Any point on this BN line indicates a combination of higher purchase of these two, compare to BO budget line.

Answer 2

To draw the customer's original and new budget lines, we need to assume an initial budget for the customer and the prices of groceries. Let's assume the customer's initial budget is $200, and the price of groceries is $10 per unit.

1. Original Budget Line: The original budget line represents the combinations of groceries the customer can afford without the coupon offer. To draw the original budget line, we need to calculate the maximum quantity of groceries the customer can buy at the given prices with the initial budget.

Let's calculate the maximum quantity of groceries: Maximum quantity of groceries = Initial budget / Price per unit = $200 / $10 = 20 units

The original budget line starts at the quantity axis intercept (0 units) and the budget axis intercept ($200) and connects the points (0, $200) and (20, $0) on a graph.

2. New Budget Line: The new budget line represents the combinations of groceries the customer can afford with the coupon offer. Since the customer will receive a $20 discount on their grocery bill, their new budget increases by $20.

Let's calculate the maximum quantity of groceries with the new budget: Maximum quantity of groceries = (Initial budget + Discount) / Price per unit = ($200 + $20) / $10 = 22 units

The new budget line starts at the quantity axis intercept (0 units) and the adjusted budget axis intercept ($180) and connects the points (0, $180) and (22, $0) on the graph.

By comparing the original budget line and the new budget line, we can see the effect of the $20 discount on the customer's purchasing power. The new budget line shows that the customer can afford to buy a greater quantity of groceries with the coupon offer compared to their original budget.