Question

3. A new cell phone service, k-mobile, charges its users by the minute, and charges more for higher use. So, a user will be charged $0.25 per minute for the first 180 minutes of use in a month, 0.75 per minute for the next 120 minutes, and $1.25 per minute for more than 300 minutes of use per month.

a. Rachel is a user of k-mobile, and she consumes all-other-goods (AOG) and cell phone minutes. The price of AOG is $1.00 per unit. Melania has $200 to spend on cell phone minutes and all other goods. Draw Melania’s budget constraint, making sure to label all axes and intercepts.

b. Suppose that instead, k-mobile charged the $0.60 per minute for any number of minutes. Draw this new budget constraint on the same graph as in part a.

c. Are the consumers better off with pricing scheme a. or b.? Explain briefly.

Answer 1