ECON-310 Course Paper (Spring 2007):
When covering Chapter 4, we described the competitive budget set for a consumer purchasing two commodities, x1 and x 2 . This set consists of all bundles that are affordable for the consumer. During lecture we focused on a situation in which the per unit price of x1 is some constant p1 and the per unit price of x 2 is some constant p 2 (thus, the terminology competitive budget set). While this is the case for many commodities that a consumer may purchase, there clearly are exceptions. Consider the following examples: i) Suppose a consumer can join a CD Club for some fixed membership fee. After joining the club she is able to purchase CDs for a lower price than she would otherwise be able to. (see pages 116-117 in Besanko and Braeutigam.) Many cellular phone service providers have multiple plans. Each different plan is typically characterized by a certain monthly fee, a certain number of free minutes, and the ability to purchase additional minutes at a certain constant per unit price. (see pages 118-119 in Besanko and Braeutigam.) In some instances a consumer must pay a fixed fee to consume a positive amount of a commodity, but is then allowed to consume as much as he wants during a certain period of time. For example, consider the manner in which beverages are often purchased at fast food restaurants or food is sold at a buffet.
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For your paper you should: 1) 2) 3) Identify a product that is not typically sold at a constant per unit price. Clearly describe how the identified product is priced in practice. After describing how the commodity is priced in practice, you should describe how the budget set for a consumer purchasing this product would differ from the competitive budget set we described during our discussion of Chapter 4. When doing this, you should: 3.1) let x1 =(the good you have identified) and x 2 =(dollars spent on all other goods and services). Once this is done, you can set p2 = 1. 3.2) simplify the actual pricing practices if necessary. That is, there is nothing wrong with analyzing a simplified situation, as long as your simplified model captures the important aspects of the actual pricing practice. You should also make every attempt to keep your description as general as possible. 3.3) clearly describe what the set of feasible bundles looks like. In most cases this is most easily done by drawing a graph and clearly describing (in words) the important characteristics of the figure. Keep in mind that any graph you draw should not only be clearly
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and precisely drawn, but also should be accurately labeled. Any figures you draw can be drawn by hand; each individual figure should appear on a separate sheet and be placed at the end of your paper. 3.4) be able to provide documentation describing the actual practice you are modeling (you do not need to include this documentation in your paper, but should be able to provide it if asked to do so). Provide a graphical analysis and brief discussion of utility maximization for a consumer facing the budget set that you have described. Your analysis should be complete, in that it should describe all possible outcomes that could occur (for example, if you have described the complex budget set that a consumer faces as a result of being able to choose from multiple cellular phone plans, you should illustrate and explain why some consumers choose a plan with a low monthly fee, very few free minutes, and a high per minute charge, while other consumers choose a plan with a high monthly fee, many free minutes, and a low per minute charge, while still other consumers do not have a cell phone at all). What should or should not be included in this discussion is highly dependent upon the budget set that the consumer faces in your example.
Your paper should be the minimum length necessary to fully describe the situation you are considering. Using a 12 point font and double-spacing, the length of the text should be at least one full page, but no more than three full pages. Academic dishonesty in any form will not be tolerated. Plagiarism is defined as the act of presenting the words or ideas of another as if they were your own. While I encourage you to read the passages of the textbook mentioned above in order to see how a discussion of this topic might be presented, your paper is to be an expression of your own thoughts and ideas, written in your own words. In fact, I would recommend that you not even have the textbook, or any other source, in your possession when writing your paper. A Rough Draft of your paper (counting as 5% of your semester grade) is due in class on Thursday, 5/3/07. The Final Version of your paper (counting as 10% of your semester grade) is due in class on Thursday, 5/17/07.
