James and Louisa each have an income of $30, which they each spend on tomatoes and all other goods. They buy tomatoes at their local farmers market, which charges $3 per pound. Define the units for all other goods so that their price is $1 per unit. Their preferences may be different, but assume they each have indifference curves with the “standard” shape, and that they each choose to consume less than 5 pounds of tomatoes at this price.
a. The farmers market decides to offer a new quantity discount. The first 5 pounds of tomatoes bought by any consumer still cost $3 per pound, but any additional quantity of tomatoes can be purchased for $1.50 per pound. Carefully draw James’ and Louisa’s new budget constraints on the two sets of axes on the next page, putting tomatoes on the x-axis and clearly indicating the quantities at the intercepts. (Note: their budget constraints will be identical since they have the same income and face the same prices/discounts)
b. In response to the quantity discount, James now purchases more than 5 pounds of tomatoes, but Louisa continues to buy less than 5 pounds. Draw indifference curves on their respective graphs that are consistent with the descriptions of each of their consumption decisions.