Question

Ralph usually buys one pizza and two colas from the local pizzeria. The pizzeria announces a...

Ralph usually buys one pizza and two colas from the local pizzeria. The pizzeria announces a special: All pizzas after the first one are half-price. Show the original and new budget lines. What can you say about the bundle Ralph will choose when faced with the new constraint?

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Answer #1

Assume Income = $60

Price of Pizza = $30

Price of cola = $15

Consumer can initially consume maximum of 4 cola and 2 pizza which makes budget line equal to ABC where consumer consumes at point B.

If after consumption of 1 pizza, price of pizza falls to $15, it will shift budget line to ABD where maximum units of pizza consumed is 3. Consumer will now consume at point E where 1 cola and 2 pizza is consumed because pizza was twice the cost of cola which will make consumer to leave 1 bottle of cola for 1 extra pizza.

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