A consumer’s opportunity set takes into
account a person’s income level to generate consumption bundles which they can
afford based on the price of a good – in this case a book is £50, and the
budget is £100.

 

PxX + PyY  £100

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With reference to figure 1, AC is the
combination of books and other goods that costing £100. This shows the consumer
can either choose bundle A (no book, but £100 for other goods), D (1 book and
£50 for other goods), or C (2 books and no money for other goods). Here there
is no offer or discount given. AB shows the combination of bundles available if
there was a discount of 50%, equalling £100. Therefore, the accessible bundles
are A, G, E, H and B. With buy one, get one free, the price of the first book
equals £50, but the second book equals £0. ADEF indicates the buy one, get one
free deal equalling precisely £100.

 

 

b)

The consumer asked if they could have a 50%
discount, however, the clerk rejected this to find out what the consumer
preferred, and since the consumer proceeded to leave the store, the clerk was
able to establish the consumer’s indifference curve – a graph that shows which
combination of goods produce the same utility (Tejvan Pettinger, 2017). The
indifference curve is labelled I on figure 1. From this, the clerk concluded
that bundle A (£100 to spend on other goods) was preferred over D, E or F (the
buy-one, get one free deal). As the consumer only had £100 to spend, a 40%
discount would give a budget line of AM, which shows that where the budget line
and indifference curve intersects (bundle J) is when 1 book is equal to £30,
with £70 left for other goods. Therefore, the consumer is indifferent between
bundle A and bundle J.

 

 

c)

Buy-one, get one free and 50% off
are not the same. As shown in figure 1, buy-one get one free means the price of
the second book is zero (bundle D and E), whereas, 50% discount halves the
price of every unit, shown by AGEHB. For this reason, the offer of buy-one get
one free also encourages consumers to purchase books, as sales are not
guaranteed.

 

Since the consumer asked for a
discount, the clerk would reasonably conclude bundle G was preferred over
bundle A. However, based on the indifference curve, the clerk knew more revenue
could be gained by offering a 40% discount, and the consumer would be
indifferent. Since £50 could be
gained with the buy one get one free deal, the clerk was unwilling to sell for
half price as that would only yield £25. However, sales are not
guaranteed, so 40% discount was offered as the consumer would be indifferent,
and this would yield £30, which is more than what the 50% discount would
achieve. Also, if half-price was offered, bundles D, G or K would not be chosen by the customer as
indifference curves cannot cross.