Give as many reasons as you can why we believe that indifference curves are convex to the origin.

60

Q3

In the twentieth century, department stores and supermarkets largely replaced

smaller specialty stores, as consumers found it more efficient to go to one store rather

than many. Consumers incur a transaction or search cost to shop, primarily the oppor-

tunity cost of their time. This transaction cost consists of a fixed cost traveling to and

from the store and a variable cost that rises with the number of different types of items

the consumer tries to find on the shelves. By going to a supermarket that carries meat,

fruits and vegetables, and other items, consumers can avoid some of the fixed transaction

costs of traveling to a separate butcher shop, produce mart, and so forth. Use math

to explain why a shopper's average costs are lower when buying at a single supermarket

than from many stores.

(Hint: define the goods as the items purchased and brought home.)