Question

A consumer with a weekly budget of $20 can choose between two international calling plans. The first plan has no sign-up costs and charges 5c per minute of conversation, the second plan charges a flat weekly fee of $5 and zero cents per minute.

Draw a diagram where you measure minutes of conversation along the horizontal axis and money for other items along the vertical axis and illustrate the consumer’s budget line under the first plan.

Under the first plan the consumer makes 90 minutes of calls each week. In your diagram, add a generic indifference curve to illustrate the consumer’s optimal bundle under the first plan.

Now, add to your diagram the consumer’s budget line under the second phone plan. What is the slope of this second budget line?

Which plan does your consumer prefer? Discuss.

Suppose the consumer considered international calls a perfect complement to all other activities, would the consumer still prefer the same plan? Discuss.

In your diagram, show the highest flat fee the consumer is willing to pay each week to use the second phone plan.

Answer 1