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Answers to Assignment Four.doc
Answers to Assignment Four.doc

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Ryerson University
ECN 104
Tom Barbiero

Answers to Assignment Four 1. Fill in the following table on the total and marginal utilities of a certain product A. Use your results to answer the following questions. Units of Marginal Product A Total Utility Utility 0 0 1 20 _____ 2 35 _____ 3 _____ 10 4 _____ 5 5 _____ 0 6 45 _____ 7 35 _____ 8 _____ –15 (a)Graph both the total utility and marginal utility curves together on the same graph. (b) Explain the shape of both of the curves. (c)Identify the point where utility is maximized on both curves. Discuss the reasoning behind each value. Units of Marginal Product A Total Utility Utility 0 0 1 20 20 2 35 15 3 45 10 4 50 5 5 50 0 6 45 –5 7 35 –10 8 20 –15 60 50 y i 40 U a 30 i a / 20 i t 10 l t T 0 0 2 4 6 8 10 -10 -20 Units of Product A (a)See graph. (b) The total utility curve has the bell shape because as the quantity is increased from smaller to larger there is a utility gain from greater consumption. However, as quantity increases there is less and less utility gain until utility starts to decline and the curve becomes upward sloping. The marginal utility curve clearly displays the law of diminishing marginal utility. Here, as consumption increases, marginal utility becomes smaller and smaller as each additional unit of production become less and less satisfying until marginal utility reaches zero and subsequently becomes negative. (c)On the total utility curve, the maximized point is the point where total utility is at its highest value, which would be the peak of the total utility curve. This is at the quantity of 4.5 and the total utility value of 50. On the marginal utility curve, the maximized point is the point where marginal utility is zero. This means that at that point there can be no further gains from additional units of consumption, or that utility is maximized. Mathematically, the marginal utility curve represents the slope of the total utility curve and the point where MU = 0 is the peak value of total utility. As with total utility, the peak quantity is 4.5 with a total utility value of 50. 2. Columns 1 through 3 in the table below show the marginal utility which a particular consumer would get by purchasing various quantities of products A, B, and C. (1) (2) (3) Unit of Marginal Marginal Marginal product utility, A utility, B utility, C First 18 39 12 Second 16 36 10 Third 14 33 9 Fourth 12 30 8 Fifth 10 27 7 Sixth 8 24 5 Seventh 6 21 3 If the prices of A, B, and C are $2, $3, and $1, respectively, and the consumer has $26 to spend on these three products, what combination of the three products should be purchased in order to maximize utility? 2 units of A, 6 units of B, and 4 units of C, shown by the fact that: 16/$2 = 24/$3 = 8/$1. The $26 in income is spent. 3. Suppose a consumer has a daily income of $100 and purchases just two goods A and B. The price of good A is $5 and the price of g
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