We will analyze Medieval Times Dinner Theatre's loyalty program using budget constraint and indifference curve analysis. A consumer has 600 dollars of income, with other goods costing 1 dollar per unit. We'll compare two pricing strategies: uniform pricing versus a buy-one-get-one-free special program.
The graph shows two budget constraints. The blue line represents uniform pricing at 45 dollars per ticket, allowing a maximum of 13.3 tickets. The red line shows the special program: 60 dollars per ticket, but after buying 6 tickets, you get 2 free. This creates a kinked budget constraint with a horizontal segment from 6 to 8 tickets.
Adding indifference curves shows how the special program increases consumer welfare. Under uniform pricing, the consumer chooses point A with 6 tickets and 300 dollars of other goods on indifference curve IC1. The special program allows the consumer to reach point B with 8 tickets and 240 dollars of other goods on higher indifference curve IC2, demonstrating increased utility despite spending the same total amount.
The consumer surplus analysis reveals the economic benefit of the special program. The yellow shaded area represents the additional consumer surplus gained by moving from point A to point B. This surplus arises because the consumer can obtain 2 additional show tickets without paying extra, while maintaining the same total expenditure of 360 dollars. The special program effectively transfers value from the firm to the consumer, creating a win-win situation that encourages higher consumption.