ECON101 Lecture 14: Household Consumption Notes
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10 Aug 2016
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Represents combinations of two commodities that a household or consumer can acquire (purchase) if it equals its entire available money income on purchasing the two commodities. If household spends all of its income on commodity y, they are able to acquire 50 units. Spending income on both x and y commodities x. Combinations located on the budget line account for the household"s entire income. Combinations beyond the budget line require more than the household"s entire income. Combinations below the budget line account for less than the household"s entire income. Spending income all on x, able to acquire 200 units rather than 100. Spending income all on y, able to acquire 100 units rather than 50. Spending income all on x, able to acquire 50 instead of 100. Spending income all on y, able to acquire 25 instead of 50: proportional change in price. If prices change proportional while money income remains constant, budget line will shift parallel to itself.
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Related Questions
A consumer finds only three products, X, Y, and Z, are for sale. The amount of utility that their consumption will yield is shown in the table below. Assume that the prices of X, Y, and Z are $10, $2, and $8, respectively, and that the consumer has an income of $74 to spend.
(a) Complete the following table by computing the marginal utility per dollar for successive units of X, Y, and Z to one or two decimal places.
(b) How many units of X, Y, and Z will the consumer buy when maximizing utility and spending all income? Show this result using the utility maximization formula.
(c) Why would the consumer not be maximizing utility by purchasing 2 units of X, 4 units of Y, and 1 unit of Z?
Product X | Product Y | Product Z | ||||||||
Quantity |
Utility |
Marginal Utility per $ |
Quantity |
Utility |
Marginal Utility per $ |
Quantity |
Utility |
Marginal Utility per $ |
||
1 | 42 | _____ | 1 | 14 | _____ | 1 | 32 | _____ | ||
2 | 82 | _____ | 2 | 26 | _____ | 2 | 60 | _____ | ||
3 | 118 | 3 | 36 | _____ | 3 | 84 | _____ | |||
4 | 148 | _____ | 4 | 44 | _____ | 4 | 100 | _____ | ||
5 | 170 | _____ | 5 | 50 | _____ | 5 | 110 | _____ | ||
6 | 182 | _____ | 6 | 54 | _____ | 6 | 116 | _____ | ||
7 | 182 | _____ | 7 | 56.4 | _____ | 7 | 120 | _____ |