A very popular sales technique at pizza establishments is : “Buy two large pizzas and get a third large pizza free (limit one free pizza per customer)” Suppose you only consume two goods, pizza and pop. Draw your budget constraint between pizza and pop assuming you have access to the offer mentioned above.
Draw indifference curves showing your consumer equilibrium in each of the following cases: (you may put them all on the same graph)
- you do not take advantage of the offer (i.e. you only buy one pizza)
- you just take advantage of the offer (i.e. you buy exactly two pizzas)
- you buy more than two pizzas.
Are you always better off with the offer above? Explain.