Economics

Problem
1. With some services, e.g., checking accounts, phone service, or pay TV, a consumer is offered a. chmce oi two

or more payment plans. One can either pay a high entry fee and get a low price per unit of servnce 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 0‘ $1
per unit for using the service. Let x be expenditure on other goods and y be consumption of the servace.

a. Write down the budget equation that you would have after you paid the entry fee for each of the two plans.
b. lfyour utility function is xy, how much y would you choose in each case?

c. Which plan would you prefer? Explain.

2. Use a diagram to prove that in case there are two goods, the substitution effect of an increase in the price of
good x reduces the demand for good x.