Query: Uber provides a membership choice that entitles members to a share discount within the value of Uber rides. Consider the next two statements:
1- Suppose an Uber buyer is detached between turning into an Uber member or paying the usual Uber journey value. This buyer won’t ever spend much less, and, on the whole, will spend extra on Uber rides if the shopper turns into a member. (Assume that Uber rides are a homogenous good.)
2- Introducing the membership choice can by no means scale back the variety of Uber rides this buyer takes.
Reply: If the Uber buyer is detached between the 2 choices, his utility have to be the identical no matter which choice he chooses. In different phrases, the 2 finances constraints the shopper faces below both choice have to be tangent to the identical indifference curve. As soon as we acknowledge this, then answering the primary a part of the query turns into easy.
The determine beneath illustrates the 2 choices. The vertical axis measures the shopper’s expenditures on all different items. The horizontal axis measures the variety of Uber rides the shopper purchases.
Given an revenue of 0A, the shopper faces a finances constraint of AF if he doesn’t buy the membership choice. Given his preferences and the finances constraint, he’ll spend 0B on all different items and AB on Uber rides.
If the shopper purchases the membership choice, he provides up spending AC on all different items, even when he doesn’t buy a single Uber journey. Nevertheless, doing so reduces the value per Uber journey, so the finances constraint turns into flatter than earlier than. Now, his finances constraint is ACE. On this case, he’ll spend OD on all different items and AD on Uber rides.
Therefore, whole expenditure on Uber rides with the go will rise by the quantity BD, so the primary assertion is true.
As for the second assertion, the quick reply is that it’s false. For instance, suppose Uber rides had been an inferior good. On this case, the membership choice might scale back the variety of Uber rides the shopper purchases though the membership reduces the value per journey.
