Решение задачи по теме Consumer Choice

Question 1.
A company considers a package to help employees with the running cost of their cars. It considers two options:

A. to offer a fixed amount of money towards the use of the car in addition to a cost-free usage for the first X0 miles;

B. to participate in the actual cost of running the car (i.e. pay a certain amount, a0, per mile used).

a. Let X represent mileage of car usage and Y all other goods. Draw each of the options while analysing the individual’s response to the proposed change (i.e. discuss the income and substitution effects);

b. which of the two options will the employee prefer if the company decided to spend the same amount of money under the two options?

c. will your answer to (2) change had option A included only free mileage?

d. which of the two options would the company prefer if it aims at achieving the same real income improvement at a lower cost?