Jim spends most of his time in Jazzman's, a coffee shop in south Bethlehem, Pennsylvania. Jim has $12 a week to spend on coffee and muffins. Jazzman's sells muffins for $2 each and coffee for $1.20 per cup. He consumes cups of coffee per week and muffins per week.
a. Draw Jim's budget line.
b. Now Jazzman's introduces a frequent-buyer card: For every five cups of coffee purchased at the regular price of $1.20 per cup, Jim receives a free sixth cup. Draw Jim's new budget line.
c. Does the introduction of the frequent-buyer card necessarily encourage Jim to consume more coffee? Show how your answer depends on Jim's preference map.
d. Use a budget line-indifference curve map analysis to explain which pricing scheme Jim prefers.