Answer to Question #28400 in Microeconomics for sam

Question

Q.3
A Company considers a package to help employees with the running cost of their cars. It consider two options :
A) to offer a fixed amount of money towards the use of a car in addition to a cost-free usage for the first X miles;
B) To participate in the actual cost of running the car (i.e. pay a certain amount a , per mile used )

a) Let X represented mileage of car and Y all other good. Draw each of the option while analyzing the individual’s response to the proposed change (i.e. discuss the income and substitution effects)
b) Which of the two options will employee prefer if the company decided to spend the same amount of money under the two options?
c) Which of the two options would company prefer if it aims at achieving the real income improvement at a lower cost?