Question

A popular cellular telephone provider offers its customers the following data plan: the first 4 gigabytes of data cost $10 each, and each additional gigabyte of data costs $20. Suppose the typical consumer has $100 to spend on gigabytes of data (D) or chocolate bars (C) which cost $1 each.
Required:
a. How many gigs of data is the typical customer likely to use?
b. Does your answer depend critically on the steepness or flatness of the typical customer’s indifference curves? Explain.

Answer 1

Answer:

a. 7 gigabytes

b. My answer depends critically on the steepness of the indifference curve

Explanation:

If the first 4 gigabytes of data cost $10 each, and each additional gigabyte of data costs $20, then the customer uses

4 gigabytes for $40 + 3 gigabytes for $20 each = 7 gigabytes of data with $100.

An indifference curve shows the combination of two goods that give the consumer equal satisfaction and utility. The indifference curve is typically a graph that has a downward sloping convex to the origin.

My answer depends critically on the steepness of the indifference curve