Question

Sal is at the County Fair with $100 dollars to spend on either rides (R) or junk food (F). The ticket price for a ride, PR, is $5 and the price of junk food, PF, is $10. At these prices, Sal plans to go on 8 rides and spend the rest of the money on food. Then, Sal notices that the ticket booth offers a special pass, for a price $50, which allows an unlimited amount of rides per day. Should Sal choose to purchase the unlimited pass or buy 8 tickets for $5 each? Sal wants to maximize his enjoyment at the Fair. Explain your answer using a consumer choice graph.

Answer 1

At the given prices initial budget line is AB and initial consumption point is E where IC1 touches AB at E. When he can buy a pass, his budget line becomes horizontal after he spends $50 on pass and $50 on junk food which is shown as ACD with C has a kink.

The new indifference curve and a higher IC2 lies at F where his utility is higher than at E. We therefore expect that under the given conditions, he may be willing to buy a pass and entail a greater utility