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:

Prothrombin

A protein present in blood plasma that is converted into active thrombin during coagulation.

Thrombin

A blood plasma enzyme responsible for blood clot formation by changing fibrinogen into fibrin.

Ions

Atoms or molecules with a net electric charge due to the loss or gain of one or more electrons.

Osmosis

The movement of water molecules through a semi-permeable membrane from a region of lower solute concentration to a region of higher solute concentration.