Question

One of Matt's favourite brands is offering a deal on its’ hooded jackets, which is sold at $100 a piece. The promotion claims that you can “get the second piece 50% off.” It means, if Matt buys a jacket for $100, he can buy the second jacket (of different colour) for 50% of the original tag price, $50. In addition, if Matt wants a third jacket, he has to pay $100 again, but now he has the privilege to purchase the fourth jacket for $50, etc. Assume the price for Other goods is $50 and Matt has an income of $1,000 to spend on both the jackets and Other goods.”

Draw Matt's budget constraint with jackets on the horizontal axis.

Answer 1

The total income of Matt is $1,000.

The price of other goods is $50.

If Matt spends all his income on other goods then he can purchase a maximum of ($1,000/$50) 20 units of other goods.

Matt makes the purchase of hooded jackets as well.

The promotion by the company selling hooded jackets states that if a person purchases 1 jacket, he can get 50% discount on second jacket.

The price of jacket is $100.

Now, if Matt utilizes all his income to purchase jackets only.

So, if Matt purchases 1 jacket, he will pay $100. He can get second jacket for $50. If Matt purchases 3rd jacket, he will pay $100. He can get fourth jacket for $50. if Matt purchases 5th jacket, he will pay $100. He can get sixth jacket for $50. If Matt purchases 7th jacket, he will pay $100. He can get eighth jacket for $50. If Matt purchases 9th jacket, he will pay $100. He can get tenth jacket for $50. If Matt purchases 11th jacket, he will pay $100. He can get 12th jacket for $50. With purchase of 12 jackets, Matt has spent $900. He is left with $100. He can purchase on more Jacket with it.

So, given the promotional offer, Matt can purchase a maximum of 13 jackets with his income of $1,000.

Following is the Matt's budget constraint -