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.

Solutions

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 1 year ago

Next > < Previous

Related Solutions

Question 2 You are out exploring plants while on a hike, and you come across a...

Question 2 You are out exploring plants while on a hike, and you come across a group of ferns. You notice some with hairy fiddleheads (immature leaves), and some without. You form a preliminary hypothesis that they are members of different species. (32 pts) Part 1: What specific features/aspects would you examine to test your hypothesis that these ferns have undergone speciation? Utilize at least two species concepts/definitions in your response. (16 pts) Part 2: What events could potentially be...

As you read the business news, you come across an advertisement for a bond mutual fund...

As you read the business news, you come across an advertisement for a bond mutual fund – a fund that pools the investments from a large number of people and then purchases bonds, giving the individuals “shares” in the fund. The company claims their fund has had a return of 13½ percent over the last year. But you remember that interest rates have been pretty low – 5 percent at most. A quick check of the numbers in the business...

In your course readings you would have come across a list of eight sectors of the...

In your course readings you would have come across a list of eight sectors of the tourism industry. List them and beside each one, explain the challenge you feel will be the hardest for that sector to overcome.

What should you do if you come across a 2-year option pair with a strike price...

What should you do if you come across a 2-year option pair with a strike price of $100, a spot price of $100, a call premium of $22, a put premium of $15, and the risk-free rate is 5%?

12. When you send someone an e-mail address, it travels across the Internet to the ____________________...

12. When you send someone an e-mail address, it travels across the Internet to the ____________________ e-mail server at your ISP, then to the incoming e-mail server at your recipient's ISP.

Use the Internet to research an annual report of on Samsung. Then, imagine you are an...

Use the Internet to research an annual report of on Samsung. Then, imagine you are an investor or creditor and suggest the ratios that you believe would provide an investor or creditor with the most important information needed to make accurate predictions about the company’s financial condition. When analyzing a company, is it more important to compare the ratios to competitors or to the company’s previous history? Provide a rationale for your response. Note: You must provide a link or...

You have come across a project which has an initial investment of INR 5 crores. The...

You have come across a project which has an initial investment of INR 5 crores. The EBIT expected from this project is INR 1 crore in perpetuity, a more stable project with more predictability in the cash flows. Project risk is similar to the business risk of the firm’s core operations. The opportunity cost of capital to the firm if it was an all equity financed firm is 14.5%. The tax rate is 30%. Would you choose this project ?...

Question #3 Setup: You come across a small office building for sale with an asking price...

Question #3 Setup: You come across a small office building for sale with an asking price of $400,000. After careful analysis, you estimate that you’ll receive $26,000 in cash flow from operations during the year (after all expenses) plus a 5.00% appreciation of the value of the property. For each part of this question, show your work with the help of a table. We strongly recommend you complete your calculations for this question in Excel (since you can reuse your...

While perusing the scientific literature late one night, you come across a report that a protein...

While perusing the scientific literature late one night, you come across a report that a protein called Thingamajig is thought to be involved in the development of antibiotic resistance, an emerging global health crisis. This putative involvement appears to involve an interaction with another protein, Whosiewhatsit. You would like to study Thingamajig, and its interaction with Whosiewhatsit, but neither protein has been cloned. a) How would you set out to study these proteins and their interaction? Describe in general terms...

You have come across a project which has an initial investment ofINR5 crores. The EBIT expected...

You have come across a project which has an initial investment ofINR5 crores. The EBIT expected from this project is INR 1 crore in perpetuity, a more stable project with more predictability in the cash flows. Project risk is similar to the business risk of the firm’s core operations. The opportunity cost of capital to the firm if it was an all equity financed firm is 14.5%. The tax rate is 30%. Would you choose this project ?

Subjects