With some services, e.g., checking accounts, phone service, or pay TV, a consumer is offered a...

  

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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 $1000. There are two plans. Plan A has an entry fee of $20 with a price of $10 per unit. Plan B has an entry fee of $40 with a price of $5 per unit for using the service. Let x, be expenditure on other goods and x,be consumption of the service. Your utility function is given by u(x1, x2) = 100x+ x2 * a. Write down the budget equation that you would have after you paid the entry fee for each of the two plans. b. Would your consumption of the service increase proportionately with income? In other words, are your preferences homothetic? Justify your answer. c. How much service would you choose in each case? How much would you spend on other goods? d. Which plan would vou prefer? Explain. 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 $1000. There are two plans. Plan A has an entry fee of $20 with a price of $10 per unit. Plan B has an entry fee of $40 with a price of $5 per unit for using the service. Let x, be expenditure on other goods and x,be consumption of the service. Your utility function is given by u(x1, x2) = 100x+ x2 * a. Write down the budget equation that you would have after you paid the entry fee for each of the two plans. b. Would your consumption of the service increase proportionately with income? In other words, are your preferences homothetic? Justify your answer. c. How much service would you choose in each case? How much would you spend on other goods? d. Which plan would vou prefer? Explain.

Answer rating: 100% (QA)

Option 1 Budget line is 100 X 20 2Y 80 X 2Y Option 2 Budget Line is 100 X 40 Y 60 X Y b U XY MUX d... View the full answer