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Budget Constraints for Composite Goods

A consumer buys good X and good Y(composite good). Price of X is 1 and Price of Y is 0.1. Total budget for X and Y is 2.

Show graphically the effect of a buy one get one free promo for X. Include explanation.

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Solution Preview

Please see the attached file.

Total budget = Px * X + Py * Y
i.e.
2 = X + 0.1Y or:
Y = 20 - 10X
So the initial budget is line AD.

But when there is buy one get one ...

Solution Summary

The budget constraints for composite goods are determined.

$2.19