Suppose everyone in a neighborhood consumes hotdogs, h and pop, c. The regular prices of one hotdog and one can of pop are p1 = $3 and p2 = $2 respectively. Everyone has m = $60 to spend. The local fast food outlet sometimes o ers the following two promotions. Either (1) you can receive a free can of pop with each hotdog you buy (you can buy more cans if you want
at the regular price) or (2) you can enjoy a one-third reduction, from $3 to $2, in the price of hotdogs.
(a) Plot the budget set when there is no promotion. Write down the equation of the budget line.
(b) On the same graph, plot the consumers' budget sets corresponding to promotions (1) and (2).
(c) Draw example indi erence curves to show a person with what preferences would choose promotion (1) over (2). What person would choose promotion (2) over (1) instead? Would anyone prefer to use neither of the two promotions if they are both o ered?