The Regression Output Is as Follows:

Exercise #2

Solutions

13. The impacts on the consumer’s budget sets are illustrated in Figure 4-6. As is shown in the diagram, if the consumer has a strong preference for other goods (so that the preferred quantity of other goods is greater than 7 units), the cash is preferred even though it is taxed. Otherwise, the non-taxable, employer-sponsored health insurance program allows an employee to achieve a higher indifference curve.

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Figure 4-6

17. Figure 4-8 illustrates a consumer’s budget line when a firm offers a “quantity discount.” A consumer will never purchase exactly 8 bottles of wine, since at this kink in the opportunity set the consumer would always be better off by buying more or less wine.

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Figure 4-8

4.21 Under the Old Plan, consumers consumed 1,499 of online monthly minutes for $14.99. The budget line under the Flat-Rate Plan, however, is significantly different. Consumers can choose to now spend all their income on all other goods (AOG), represented by point A on the AOG axis or consume the same about AOG and any amount of online minutes up to the maximum number of minutes in a month. Optimizing consumers will choose the corner solution represented by the same number of units of AOG as the Old Plan and 43,200 online monthly minutes. Thus, UK consumers are necessarily better off (assuming no busy signals). AOL UK, however, gains no additional revenues and presumably must increase it network capacity. Therefore, AOL UK may earn lower profit (ignoring other factors).

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A

Old Plan

AOG

1,499

43,200

1,499

43,200

AOG