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Maximizing utility and equilibrium prices

1. A consumer is at equilibrium at one of the 4 points (A, B, C, or D) shown in Figure 1 (attached to this assignment).
a. If we know that the consumer is maximizing his/her utility, and that the price of Skittles is not the same as the price of M&M's, at what point is the consumer operating? Explain your logic.
b. If the price of M&M's is $.50 each, what is the income of the consumer described above? Explain.
c. How much does the consumer spend on M&M's? On Skittles? Explain your logic.
d. What is the price of Skittles for this consumer? Explain how you reached your answer.

2. Southwest Airlines gives away hundreds of tickets each year through its frequent flyer programs, with free ticket for each 16 flight segments flown on the airline. The average airline ticket costs $300 and is for a 1,000-mile round trip. Given this information, evaluate the following statement: Southwest could have the same effect on demand by eliminating their frequent flyer program and simply lowering the average ticket price by 10 percent.


Solution Preview

Utility maximization occurs where the budget line is tangent to the indifference curve. This occurs only at points B and A. Since at point B, the prices are the same, the answer must be A.

Income can be calculated by multiplying the ...

Solution Summary

Frequent flyer programs and maximizing utility with indifference curves