Answer to Question #203345 in Microeconomics for Ana

Question

Gift cards are a popular holiday gift, with between $40 and $45 billion being spent on gift cards annually.

a) Suppose a consumer is indifferent between receiving a $100 gift card for Best Buy and $100 in cash. Is the optimal bundle an interior solution or a corner solution?

b) If a consumer is indifferent between a $100 gift card and $50 cash, where on their budget curve does their indifference curve lie? Show on a graph

Answer 1

A corner solution is obtained whenever a consumer attains optimum utility by consuming only one good out of the two goods available to them. This point is at the axis where the consumption of one good is zero. Whereas an interior solution occurs when a consumer attains optimum utility by consuming a bundle comprising of both the goods available to them. This point is tangential to the indifference curve.

Having known the above insights the answers to the questions are given as below;

a)The optimal bundle is a corner solution

b) the indifference curve lies where the budget curve cuts the vertical axis

This is because the consumer has to consume either the $100 gift card or $50 cash.There is no option for a combination of both.