Answered: Problem 4: Consider a person who shops…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Transcribed Image Text:Problem 4: Consider a person who shops for shirts online with a particular brand-name supplier (e.g., Lands End). Consider the utility maximizing graph below. Let I denote the person's income, PoG be the price of other goods, and Ps be the price of shirts from this brand-name supplier. The straight line is the budget constraint and the bowl-shaped curve is this person's indifference curve. O* and S* denote the utility-maximizing amounts of other goods and shirts the person picks given I, PoG, and Ps. Other Goods I/PoG O* S* /Ps Shirts Since this person shops online, when this person goes to check out and pay, the brand-name supplier can offer this person additional shirts at a 25% discount. Using the above graphical framework, predict how the person depicted above will react. How does this affect the amount of money this person spends on other goods? Hint: How does this person's budget constraint change and how does that affect (if at all) this person's new optimal choice of utility maximizing quantities.

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