Ask: Uber offers a membership option that entitles members to a percentage reduction in the price of Uber rides. Evaluate the following two statements:
1- Suppose a Uber customer is indifferent to become an Uber member or pay the standard Uber-Rit price. This customer will never spend less and will generally spend more on Uber rides if the customer becomes a member. (Assume that Uber rides are a homogeneous.)
2- Introducing the membership option can never reduce the number of Uber rides that this customer makes.
Answer: If the Uber customer is indifferent between the two options, its usefulness must be the same, regardless of which option it chooses. In other words, the two budget restrictions with which the customer is confronted with both options, ranks must be due to the same indifference curve. As soon as we recognize this, answering the first part of the question becomes simple.
The image below illustrates the two options. The vertical axis measures the customer’s expenses for all other goods. The horizontal axis measures the number of Uber rides that customer purchases.
Given an income of 0A, the customer is confronted with a budget restriction if he does not buy the membership option. Given his preferences and the budget restriction, he will spend 0B on all other goods and AB on Uber rides.
If the customer buys the membership option, he gives it up on all other goods, even if he does not buy any Uber ride. However, this lowers the price per Uber ride, so that the budget restriction becomes flatter than before. Now his budget restriction is bait. In this case he will spend OD on all other goods and advertisements on Uber rides.
That is why the total expenditure for Uber rides with the pass will rise by the amount of BD, so the first explanation is true.
Regarding the second statement, the short answer is that it is false. For example, suppose Uber rides were an inferior good. In this case, the membership option can reduce the number of Uber rides the purchases of the customer, although membership lowers the price per ride.