8. (25 points) With some services (e.g. checking accounts, phone service, or pay TV), a consumer is offered a choice of two or more payment plans. One can either pay a high entry fee and get a low price per unit of service or pay a low entry fee and a high price per unit of service. Suppose you have an income of $100. There are two plans. Plan A has an entry fee of $20 with a price of $2 per unit. Plan B has an entry fee of $40 with a price of $1 per unit for using the service. Let x be expenditure on other goods and y be consumption of the service. Explain your answer. (i) Write down the budget equation that you would have after you paid the entry fee for each of the two plans. (ii) If your utility function is u(x, y) = xy, how much y would you choose in each case? (iii) Which plan would you prefer? Explain.
8. (25 points) With some services (e.g. checking accounts, phone service, or pay TV), a consumer is offered a choice of two or more payment plans. One can either pay a high entry fee and get a low price per unit of service or pay a low entry fee and a high price per unit of service. Suppose you have an income of $100. There are two plans. Plan A has an entry fee of $20 with a price of $2 per unit. Plan B has an entry fee of $40 with a price of $1 per unit for using the service. Let x be expenditure on other goods and y be consumption of the service. Explain your answer. (i) Write down the budget equation that you would have after you paid the entry fee for each of the two plans. (ii) If your utility function is u(x, y) = xy, how much y would you choose in each case? (iii) Which plan would you prefer? Explain.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:8. (25 points) With some services (e.g. checking accounts, phone service, or pay TV), a
consumer is offered a choice of two or more payment plans. One can either pay a high
entry fee and get a low price per unit of service or pay a low entry fee and a high price
per unit of service. Suppose you have an income of $100. There are two plans. Plan
A has an entry fee of $20 with a price of $2 per unit. Plan B has an entry fee of $40
with a price of $1 per unit for using the service. Let x be expenditure on other goods
and y be consumption of the service. Explain your answer.
(i) Write down the budget equation that you would have after you paid the entry fee
for each of the two plans.
(ii) If your utility function is u(x, y) = xy, how much y would you choose in each
case?
(iii) Which plan would you prefer? Explain.
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