A company considers a package to help employees with the running costs of their cars.It considers two options :
A.to offer fixed amount of money towards the use of the car in addition to a cost-free usage for the first X0 miles;
B.to participate in the actual cost of running the car(i.e. pay a certain amount,a0,per mile used)

a)let X represents mileage of car usage and Y all other goods.Draw each of the options while analyzing the individual's response to the proposed change(i.e.discuss the income and substitution effects);

Question

A company considers a package to help employees with the running costs of their cars.It considers two options :
A.to offer fixed amount of money towards the use of the car in addition to a cost-free usage for the first X0 miles;
B.to participate in the actual cost of running the car(i.e. pay a certain amount,a0,per mile used)

a)let X represents mileage of car usage and Y all other goods.Draw each of the options while analyzing the individual's response to the proposed change(i.e.discuss the income and substitution effects);

anonymous · Answer

b)which of the two options will the employee prefer if the company decided to spend the same amount of money under the two options?
c)which of the two options would the company prefer if it aims at achieving the same real income improvement at a lower cost?