John purchases 12 CDs and 15 cheese pizzas in a typical year. If cheese pizzas are inferior goods, would Mike be indifferent between receiving a $30 gift certificate at a local music store and $30 in cash? Please explain. Thanks
To determine if Mike would be indifferent between receiving a $30 gift certificate at a local music store and $30 in cash, we need to understand the concept of inferior goods and how it relates to his purchases.
Inferior goods are products for which demand decreases as consumer income increases. In this case, cheese pizzas are considered inferior goods.
Given that cheese pizzas are inferior goods, as Mike's income increases, he would be expected to decrease his consumption of cheese pizzas. Therefore, receiving $30 in cash would give him more flexibility to spend the money on other goods or services that are not considered inferior, such as CDs.
On the other hand, receiving a $30 gift certificate at a local music store restricts Mike's options to purchasing CDs, which are not considered inferior goods. Therefore, even though the gift certificate has a specific purpose, it still allows Mike to purchase a good that he would have purchased regardless of his income level.
In conclusion, since cheese pizzas are inferior goods and Mike's preferences may change as his income increases, he would likely prefer to receive $30 in cash, as it provides more flexibility in choosing between CDs or other goods, rather than being tied to purchasing only CDs with the gift certificate.