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# Sally is a frequent flyer whose fares are

Sally is a frequent flyer whose fares are reduced through coupon offerings. She receives a 20% reduction on fares after she flies 20,000 miles, and 40% reduction after she flies 40,000 miles. a) Illustrate her budget constraint. b) Illustrate how her level of utility will change given these frequent-flyer coupons. ========================== I am very confused by this question. Here we are asked to find the budget constraint, but I am not even sure what the two goods areâ€¦what are the goods that should be plotted on the vertical and horizontal axes? Will the budget line be a straight line? How would the coupons change the budget line? Can someone please help me? Thank you very much! Ok, Put air-line travel miles on the x-axis, â€œall other goodsâ€ on the y-axis. On the x-axis, mark a point for 20000 miles, and another at 40000. Begin high up on the on the y-axis and start drawing a standard budget constraint line. However, when the line hits the 20000 level, the price of travel suddenly drops. This is represented as a kink on the budget line; Sally can get more airline miles than a straight-line budget constraint would show. Continue the new budget constraint line from the kink point until you hit 40000, in which youâ€¦ get another kink point. Continue from here until you eventually hit the x-axis. Pat yourself on the back. b) Utility maximization will still occur when the highest indifference curve is tangent to the 3-part budget constraint line. It will be theoretically possible that a single indifference curve could be tangent at 2 or even all 3 parts of the constraint.