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Figure 4.16 Quantity Discounts and the Budget Constraint
When the price of phone minutes is constant at 10 cents per minute, Alex’s budget constraint for phone minutes and pizza has a constant slope, as represented by the solid line. If the phone company offers a quantity discount on phone minutes, however, Alex’s budget constraint will be kinked. Here, Alex’s calling plan charges 10 cents per minute for the first 600 minutes per month and 5 cents per minute after that, resulting in the kink at 600 phone minutes shown by the dashed line. The triangle above the initial budget constraint and below the dashed line represents the set of phone minute and pizza combinations Alex can afford under the new pricing scheme that he could not have purchased at a constant price of 10 cents per minute.