1. Chapter 4 homework
Questions 6, 8, and 16

2. Managerial Economics & Business Strategy
Chapter 4
The Theory of Individual Behavior

3. Normal Good Income effect (+) Substitution effect (+) Total effect (+)
How Draw??

4. Clothing A C B
Substitution Effect
Food
Income Effect
Total Effect

5. 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??

6. Clothing B A C
Substitution Effect
Food
Income Effect
Total Effect

7. 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.

8. Is this useful?? X Y $ D II I
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. P0 P1 X0 X1

9. 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 D2 DM
1 2 Q Q

10. 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

11. A Classic Marketing Application
Other goods (Y) II I A C B F D E
Pizza (X)
0.5 1 2
A buy-one, get-one free pizza deal.

12. 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