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Managerial Economics and Opportunity Set

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A recent newspaper circular advertised the following special on tires: "Buy three, get the fourth tire for free—limit one free tire per customer." If a consumer has $360 to spend on tires and other goods and each tire usually sells for $40, how does this deal impact the consumer's opportunity set?

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The consumer's original budget line is ADB. This is because without the deal, if a consumer has $360 to spend on tires and other goods, and each tire usually sells for $40, then the consumer can buy 9 tires.
360/40 = 9

When the consumer is offered "buy three get one free", the budget line becomes ADEF. ...

Solution Summary

This solution contains 223 words and one graph explaining how the budget line changes and also how the deal impacts the consumer's opportunity set.

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Do these preferences exhibit a diminishing marginal rate of substitution between store-
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Assume that this consumer has $24 of income to spend on sugar, and the price of a store-brand sugar is $1 per pound and the price or producer-brand sugar is $3 per pound. How much of each type of sugar will be purchased?

How would your answer change if the price of store-brand sugar was $2 per pound and the price of producer-brand sugar was $3 per pound?

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