Question #63414

a company offers its customers a discount of £d per unit on

Household Goods (h). To be eligible for this discount, customers must pay an annual fee

a) Assuming strictly convex preferences, indicate with the use of an indifference curve

drawn within the axes below the fee £X which would make an individual indifferent

to the offer.

b) If the individual did become a customer at that fee and purchased h* units per year,

what would be the annual value, £dh*, to her of the discount? Show that this value is

greater than £X and explain your results

Household Goods (h). To be eligible for this discount, customers must pay an annual fee

a) Assuming strictly convex preferences, indicate with the use of an indifference curve

drawn within the axes below the fee £X which would make an individual indifferent

to the offer.

b) If the individual did become a customer at that fee and purchased h* units per year,

what would be the annual value, £dh*, to her of the discount? Show that this value is

greater than £X and explain your results

Expert's answer

a) Assuming strictly convex preferences, the total amount of the fee should be equal to the amount of discount which would make an individual indifferent to the offer.

b) If the individual did become a customer at that fee and purchased h* units per year, then the annual value, £dh*, of the discount to her is X*h.

b) If the individual did become a customer at that fee and purchased h* units per year, then the annual value, £dh*, of the discount to her is X*h.

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