Draw a graph of typical budget constraints

Reference no: EM132198875

Question: Geriatric Phone Company serves older Americans who live off of Social Security payments. It uses a at- rate pricing scheme for data use, unlike more youth-focused companies that allow for unlimited data use. The company charges $2/gigabyte to its consumers for each gigabyte worth of data they download to their phone over the cellular data network. The company has 100,000 data-plan subscribers and they have the same preferences on cellular data (x1) and a composite good(x2). Assume the price of the composite good is $4/unit. Each plan subscriber has the same monthly Social Security income: $3,000. Currently, each subscriber uses 100GB worth of data per month. The company is now considering changing its pricing policy into a two-tier policy: it charges $2/GB for the first 100GB of data, but only $0.5/GB for all additional data. Under this new pricing scheme, will data usage increase? Explain.

(a) Draw a graph of typical indifference curves, budget constraints, the optimal choice of a typical subscriber under the current fixed-rate policy and the new two-tier pricing scheme. Make the horizontal axis the amount of data downloaded (in GB) (x1) and the vertical axis the amount of the composite goods (x2) consumed.

(b) Provide a justification for, and list any necessary assumptions related to, your answer previous answer (a) in a few succinct sentences.

Reference no: EM132198875

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