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Part II: Considering Which Side You’re On in the Decision-Making Process
Figure 5-5: Utility maximizing number of tacos and pizza slices.
The customer’s goal is to maximize utility by going to the highest indifference curve touched by the budget constraint Ba. For the indifference curve map in Figure 5-5, the highest indifference curve touched by the budget constraint Ba is Ua, which indicates the customer buys six tacos and zero slices of pizza. Now, you decide to offer a special promotion: buy one slice of pizza and your second slice is free. Now, if customers buy one slice of pizza, they can still buy four tacos. And because the second slice of pizza is free, the customers can still buy four tacos with two slices of pizza. The resulting budget constraint is described in the last two columns of Table 5-2. On the graph, this promotion has added a horizontal section to the budget constraint, shifting the budget constraint out at the point between one and two slices of pizza. (Remember, the second slice of pizza doesn’t cost customers anything.) The new budget constraint for the customer is Bb in Figure 5-6. Again, your customers want to maximize utility by finding the highest indifference curve touched by the new budget constraint. This is the indifference curve Ub in Figure 5-6 and it indicates that the customers now buy four tacos and two slices of pizza. You’ve gone from selling no pizza to this customer to selling two slices! And as an added bonus, your customer is getting even more satisfaction than before.
