Question

In: Economics

Canadian Tire recently advertised the following special on tires: “Buy three, get the fourth tire for...

Canadian Tire recently advertised the following special on tires: “Buy three, get the fourth tire for free – limit one free tire per customer.” Illustrate how this offer impact the consumer’s opportunity set.

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Question:

Canadian Tire recently advertised the following special on tires:

“Buy three, get the fourth tire for free – limit one free tire per customer.” Illustrate how this offer impact the consumer’s opportunity set

Solution:

Suppose the total amount a consumer has $ 500 to spend on two goods i.e. good- X ( Tire) and good- Y (another good). The price of tire for selling is $50.

The consumers opportnity set with budget constraint will be as

(Price of Good X ) * (Quantity of good X) + ( Price of good Y) * ( Quantity of good Y ) = Y

PX. * Q X   + P Y * Q Y = Y

Step:1 Suppose , when P X = $ 50 and P Y = $ 1 with total amount of spending is $ 500

then, $ 50 * 10 + $ 1 * 0 = $ 500

so, the maximun tire can be purcahse by a consumer will be 10 with no another quanity of goods.

Step:2 Suppose, when P X = $ 50 and P Y = $ 1 then,

$ 50 * 0 + $ 1 * 500 = $ 500

so, The maximum no. of units good Y can be purchased as 500 units with no quanity of Tire purchasing.

Step:3 But the 3 quanity of tire is purchase the,

$ 50 * 3 + $ 1 * 350 = $ 500

= $ 150 + $ 350 = $ 500 ....................1

But in actual,

$ 50 * (3+4) + + $ 1 * 150 = $ 500

= $ 350 + $ 1 * 150 = $ 500 ................2

then, from 1 and 2 equation saving from this will be $ 350 - $ 150 = $ 200 . This is an amount more through which a consumer can purchase additional units of good- Y because 4 units of tire have no price

So, New impact the consumer’s opportunity set will be

$ 50 * 7 + $ 1 * 350 = $ 500

$ 150 + $ 350 = $ 500

So, This offer total changed the impact on opportnity cost set which shows that the payment is done only for 3 units but 4 more units is purchased in the same price i.e., $ 50 .

Hence, 7 units of Tire and 350 units of another good cab purchased through the given income.

The downward sloping curve shows all the combinations of these two goods which consumer can purchase with his...


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