Suppose a business offers a 10% discount on the good x₁ that it sells.
a.Illustrate a consumer's before and after-discount budget constraint by modeling x₂ as a composite good.
b.Suppose you observe only the after-discount consumption decision of the consumer.Can you tell from this information how much revenue the firm is giving up (from this consumer) by offering the discount? If so, illustrate this in your graph.
c.Suppose that, instead of the firm offering the 10% discount, the government subsidized consumption of x₁ sufficiently to reduce p₁ by 10%.Suppose again that you only observe the after-subsidy decision of the consumer.Can you tell how much of a subsidy payment is made to this consumer by the government? If so, illustrate it in your graph.
d.Why are your answers to (b) and (c) different?

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The Answer of Suppose a business offers a 10% discount on the good x₁ that it sells. a.Illustrate a consumer's before and after-discount budget constraint by modeling x₂ as a composite good. b.Suppose you observe only the after-discount consumption decision of the consumer.Can you tell from this information how much revenue the firm is giving up (from this consumer) by offering the discount? If so, illustrate this in your graph. c.Suppose that, instead of the firm offering the 10% discount, the government subsidized consumption of x₁ sufficiently to reduce p₁ by 10%.Suppose again that you only observe the after-subsidy decision of the consumer.Can you tell how much of a subsidy payment is made to this consumer by the government? If so, illustrate it in your graph. d.Why are your answers to (b) and (c) different?

Suppose a Business Offers a 10% Discount on the Good