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Managerial Economics and Opportunity Set

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A recent newspaper circular advertised the following special on tires: "Buy three, get the fourth tire for free—limit one free tire per customer." If a consumer has $360 to spend on tires and other goods and each tire usually sells for $40, how does this deal impact the consumer's opportunity set?

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Solution Summary

This solution contains 223 words and one graph explaining how the budget line changes and also how the deal impacts the consumer's opportunity set.

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The consumer's original budget line is ADB. This is because without the deal, if a consumer has $360 to spend on tires and other goods, and each tire usually sells for $40, then the consumer can buy 9 tires.
360/40 = 9

When the consumer is offered "buy three get one free", the budget line becomes ADEF. ...

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J Pye, MSc
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  • MSc, California State Polytechnic University, Pomona
  • MBA, University of California, Riverside
  • BSc, California State Polytechnic University, Pomona
  • BSc, California State Polytechnic University, Pomona
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