P-9.

CONSUMER CHOICE WITH A QUANTITY DISCOUNT

Kim has a monthly income of $1000. He spends this income on gummy bears (G) and "other goods" (X). The first 2500 gummy bears always cost $0.2 per unit. When buying more than 2500 gummy bears, they are offered at a discounted price of $0.1per unit for any amount above 2500. The unit price of the "other goods" is $1.

• Provide the budget set sketch

• Using optimization techniques, determine Kim's optimal bundle given that his preferences can be represented by the utility functionU (G, X) = GX. Make sure to also Illustrate your answer graphically.

• Suppose instead that Kim's utility function is V(G, X) =GX 25. How would that change your answer to subquestion 2? Explain.