Currently, if you join Columbia House’s DVD club, you get 3 DVDs for $1 each, but you have to commit to buying at least 3 more DVDs at $20 each over the next year. Suppose the normal market price of a DVD is $16.

a. Construct two budget constraints: one for a consumer who joins Columbia House and another for a consumer who doesn’t.

Assume that both consumers have $100 worth of income. Place income on the vertical axis just as in Figure 23.12.

b. What kind of consumer is likely to get more utility from joining Columbia House? What kind of consumer would not?

c. If Columbia House wanted to charge an additional membership fee to generate more revenue, what would be the maximum it could charge for membership?