Chapter 4 homework
Questions 6, 8, and 16
Managerial Economics &
Business Strategy
Chapter 4
The Theory of Individual
Behavior
Normal Good
•
•
•
•
Income effect (+)
Substitution effect (+)
Total effect (+)
How Draw??
Inferior Good
• Negative Income effect
• Substitution effect will always be the same direction
no matter what the type of good

A decline in the price will lead to more of that good consumed
• How draw??
Can we do it?? (number 17)
• A common marketing tactic among many liquor stores is to
offer their clientele quantity (or volume) discounts. For
instance, the second-leading brand of wine exported from
Chile sells in the US for $8 per bottle if the consumer
purchases up to eight bottles. The price of each additional
bottle is only $4. If a consumer has $100 to divide between
purchasing this brand of wine and other goods, graphically
illustrate how this marketing tactic affects the consumer’s
budget line if the price of the other good is $1. Will a
consumer ever purchase exactly eight bottles of wine?
Explain.
Is this useful??
Y
• An individual’s
demand curve is
derived from each new
equilibrium point
found on the
indifference curve as
the price of good X is
varied.
II
I
X
$
P0
D
P1
X0
X1
X
Market Demand
• The market demand curve is the horizontal
summation of individual demand curves.
• It indicates the total quantity all consumers would
purchase at each price point.
$
Individual Demand
Curves
$
Market Demand Curve
50
40
D1
1 2
D2
Q
1 2 3
DM
Q
Why do firms use buy one get one
free??
• “Buy one pizza at full price and get a second pizza
free”

Budget line changes after purchase of one pizza
• Flat (zero slope) for SECOND PIZZA only
• Then falls normally

Allows you to reach a higher indifference curve
• Consumer better off

Is the firm better off??
• Consumers “like” the firm for doing this  repeat business
• Consumer may buy more pizzas
A Classic Marketing
Application
Other
goods
(Y)
A buy-one,
get-one free
pizza deal.
A
C
E
D
II
I
0
0.5
1
2
B
F
Pizza
(X)
Do you want a gift or cash for your
birthday??
• Cash moves you to a higher indifference curve


Expands your possible consumption bundle
With cash you can purchase anything from anywhere