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Managerial Economics & Business Strategy

Michael Baye, Jeff Prince

Business Studies

8th Edition · 672 pages

ISBN: 9780073523224

Chapter 4: Q5CCQ (page 157)

Provide an intuitive explanation for why a “buy one, get one free” deal is not the same as a “half-price” sale.

Short Answer

Expert verified

A half-price sale indicates a decrease in the price of commodities to half, whereas, buy-one get one free deal indicates charging full price for a commodity along with selling another at no price.

Step by step solution

01

Term Description

Half-price: It indicates the situation where the consumer buys a commodity at a price that is half of the original price. For example, if the consumer buys a cold drink for $5 on a normal day, he will buy the same cold drink at $2.5 on a half-price sale.

Buy one, get one free: It indicates the situation where the consumer buys a commodity at the original price but in turn receives one more of the same commodity at no cost. For example, if he buys a cold drink for $5, he will receive another cold drink free at buying one get one free sale.

02

The difference between the terms

There is a common misconception among consumers that the “buy one get one free” deal is as similar as “half–price.” Both the deals are different because in the "buy one, get one free" deal, the consumer pays for the price of a whole item, but the consumer gets two items. It does not change the price of any item.

But, with a "half-price" sale, the consumer gets to buy an item with fifty percent off its original market price and the consumer only gets a single item.

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Most popular questions from this chapter

Illustrate how changes in prices and income impact an individual’s opportunities.

An internal study at Mimeo Corporation—a manufacturer of low-end photocopiers—revealed that each of its workers assembles three photocopiers per hour and is paid $\(3$ for each assembled copier. Although the company does not have the resources needed to supervise the workers, a full-time inspector verifies the quality of each unit produced before a worker is paid for his or her output. You have been asked by your superior to evaluate a new proposal designed to cut costs. Under the plan, workers would be paid a fixed wage $\) 8$ per hour. Would you favour the plan? Explain.

A recent newspaper circular advertised the following special on tires: “Buy three, get the fourth tire for free—limit one free tire per customer.” If a consumer has $\(360$ to spend on tires and other goods and each tire usually sells for $\) 40$ , how does this deal impact the consumer’s opportunity set?

Question: Suppose that the owner of Boyer Construction is feeling the pinch of increased premiums associated with workers’ compensation and has decided to cut the wages of its two employees (Albert and Sid) from \(25 per hour to \)22 per hour. Assume that Albert and Sid view income and leisure as “goods,” that both experience a diminishing rate of marginal substitution between income and leisure, and that the workers have the same before- and after-tax budget constraints at each wage. Draw each worker’s opportunity set for each hourly wage. At the wage of \(25 per hour, both Albert and Sid are observed to consume 12 hours of leisure (and equivalently supply 12 hours of labor). After wages were cut to \)22, Albert consumes 10 hours of leisure and Sid consumes 14 hours of leisure. Determine the number of hours of labor each worker supplies at a wage of $22 per hour. How can you explain the seemingly contradictory result that the workers supply a different number of labor hours?

A consumer must divide $\(600$ between the consumption of product $X$ and product $Y$ . The relevant market prices are $P_{x} = \) 10 & P_{y} = \(40$

a.Write the equation for the consumer’s budget line.

b.Illustrate the consumer’s opportunity set in a carefully labelled diagram.

c.Show how the consumer’s opportunity set changes when the price of good $X$ increases to $\) 20$ . How does this change alter the market rate of substitution between goods $X$ and $Y$ ?

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