Introducing the frequent buyer program

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Reference no: EM1317185

Jim spends much of his time in Jazzman's, a coffee shop in South Bethlehem, PA. Jim has $12 per week to spend on coffee and mu¢ ns. Jazzman's sells muffins for $2 apiece and coffee for $1.20 per cup. He consumes q_c cups of coffee and q_m muffins per week.

(a) Draw Jim's budget line (throughout, please put coffee on the vertical axis)
(b) Now Jazzman's introduces a frequent buyer card: for every five cups of coffee purchased at the regular price, Jim receives a free sixth cup. Draw Jim's new budget line.
(c) Does the introduction of the frequent-buyer program necessarily encourage Jim to consume more coffee? Defend your answer with indifference curve analysis.
(d) Use a budget line-indifference curve map analysis to explain which pricing scheme Jim prefers.

Reference no: EM1317185

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