With Some Services, E

question 75

Essay

With some services, e.g., checking accounts, phone service, or pay TV, a consumer is offered a choice of two or more payment plans. One can either pay a high entry fee and get a low price per unit of service or pay a low entry fee and a high price per unit of service. Suppose you have an income of $100. There are two plans. Plan A has an entry fee of $20 with a price of $2 per unit. Plan B has an entry fee of $40 with a price of $1 per unit for using the service. Let x be expenditure on other goods and y be consumption of the service.
a. Write down the budget equation that you would have after you paid the entry fee for each of the two plans.
b. If your utility function is xy, how much y would you choose in each case?
c. Which plan would you prefer? Explain.

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Definitions:

Rent-seeking Activities

Efforts to increase one’s share of existing wealth without creating new wealth, often through manipulation of the economic environment.

Economic Efficiency

Economic Efficiency occurs when a system allocates resources in a way that maximizes the production of goods and services at the lowest cost.

Political Corruption

The abuse of entrusted power by political leaders for private gain, undermining democracy and governance.

Special-interest Effect

Describes how policy decisions can be influenced by small groups who stand to gain substantially, often at the expense of the larger population.