You come across an Internet offer: with a $100 annual membership contribution to the National Geographic...

You come across an Internet offer: with a $100 annual membership contribution to the National Geographic Society, you can get a 50 percent discount on purchases from the National Geographic online gift shop. Suppose that you get no utility from the membership per se, but have friends who enjoy unusual gifts. Suppose also that you had been purchasing $200 worth of gifts annually from the online shop before seeing the offer. You are a rational, well-behaved consumer, with $400 per year to spend on discretionary purchases like gifts.

a. Draw precisely, with numeric labels, your budget set if you take the offer, and your budget set if you do not, in the diagram below. Draw an indifference curve at your optimum prior to the offer, and indicate the numerical amounts spent on gifts and other items at that optimum.

b. Will you want to take the offer? Explain, and support your explanation with reference to the diagram.

c. If you were to take the offer, would your gift purchases now be higher, lower, or unchanged? Explain, also with reference to the diagram.

Expert Solution

Pls see teh figure below. Gifts are on vertical axis and other consumption on horizontal axis. Blue straight line is the original budget line meaning that the person can consumer $400 worth of otehr goods or buy gits or any combination in between with their discretionary budget. Similarly when they buy $100 worth of membership, they can buy $600 worth of gifts (with the $300 of remaining cash with them), or $300 worth of other goods. This is shown by the orange straight line.

Now pls see the blue IC which implies that the person is at $200 worth of gifts and $200 worth of other consumption if they don't buy the membership. However, if they buy the membershipt they will certainly buy gifts worth more than $200 else it doesn't make sense (only buy spending at least $100, and therefore getting gifts worth $200, are they able to recover teh cost of membershp). This is represented by the orange IC. They probably buy $300 worth of gifts for which they spend $100 on membership and $300/2 = $150 on buying the gifts, i.e. a total of $250 on gifts, thus saving $50, and they also get $150 worth of otehr goods.

Rahul Sunny answered 2 years ago

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