Angela and Betty are deciding how many nights to stay at a resort. Given above are the budget lines and indifference curves for both Angela and Betty. They are not travelling together and therefore will make independent decisions (they do not have to stay the same number of nights) L1 is the budget line for each of them before any discounts are offered. Each of them is offered a "Buy Three Nights Get One Free" deal, where if they stay for three nights the fourth night is free. This is just a one-time discount and all subsequent nights after the fourth night are at the undiscounted price. The budget line after the discount is the heavily shaded blue line L2. You may assume that each consumer wishes to maximize their utility (satisfaction) when determining the number of nights they will stay.

(a) With the budget line at L1 how many nights will Angela stay?

(b) With L¹ the budget line how many nights will Betty stay?

(c) With the budget line of L² (after the discount) will Angela take advantage of the offer to pay

for three nights and stay for the fourth night free? Please explain.

(d) With the budget line of L² (after the discount) will Betty take advantage of the offer to pay

for three nights and stay for the fourth night free? Does Betty move to a higher indifference curve after the discount? Please explain.

Transcribed Image Text:

(a) Angela Other goods per month 111²2² 2 3 L¹ L2, BOGOF 4 Rooms, Nights per month (b) Betty Other goods per month 2 | 3 L2, BOGOF 4 Rooms, Nights per month (a) Angela Other goods per month 111²2² 2 3 L¹ L2, BOGOF 4 Rooms, Nights per month (b) Betty Other goods per month 2 | 3 L2, BOGOF 4 Rooms, Nights per month

Answer rating: 100% (QA)

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