ECON 2000 : Consumption Decision Example
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You can only consume two goods: hamburgers and smoothies. The price of each hamburger is $2.00 and the price of each smoothie is $1.00 and you have only $11 dollars to spend.
A. How do you allocate your budget? (What would you buy first, second, or last). Use the table below to make your calculations. Please show your work.
B. What would be the TOTAL UTILITY you obtain from your purchase? (Show your calculations)
C. Define the Law of Diminishing Marginal Utility. How can it be explained by looking at the table below?
Hamburgers $2each |
Smoothies $1 each |
||||||
Qd |
Total Utility |
MU |
MU/Ph |
Qd |
Total Utility |
MU |
MU/Ps |
1 |
45 |
|
|
1 |
25 |
|
|
2 |
85 |
|
|
2 |
45 |
|
|
3 |
120 |
|
|
3 |
60 |
|
|
4 |
150 |
|
|
4 |
70 |
|
|
5 |
175 |
|
|
5 |
77.5 |
|
|
6 |
195 |
|
|
6 |
82.5 |
|
PLEASE FIND SOLUTIONS TO WHERE QUESTION MARKS ARE INDICATED AND SOLVE THE FORMULA AT BOTTOM
Columns 1 through 4 in the accompanying table show the marginal utility, measured in utils, that Ricardo would get by purchasing various amounts of products A, B, C, and D. Column 5 shows the marginal utility Ricardo gets from saving. Assume that the price of good A is $9.00, the price of good B is $3.00, the price of good C is $2.00 and the price of good D is $12.00. Ricardo's income is $53.00.
Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | |||||
Units of Good A | MU | Units of Good B | MU | Units of Good C | MU | Units of Good D | MU | Number of Dollars Saved | MU |
1 | 72 | 1 | 24 | 1 | 15 | 1 | 36 | 1 | 5.00 |
2 | 54 | 2 | 15 | 2 | 12 | 2 | 30 | 2 | 4.00 |
3 | 45 | 3 | 12 | 3 | 8 | 3 | 24 | 3 | 3.00 |
4 | 36 | 4 | 9 | 4 | 7 | 4 | 18 | 4 | 2.00 |
5 | 27 | 5 | 7 | 5 | 5 | 5 | 13 | 5 | 1.00 |
6 | 18 | 6 | 5 | 6 | 4 | 6 | 7 | 6 | 0.50 |
7 | 15 | 7 | 2 | 7 | 3.5 | 7 | 4 | 7 | 0.25 |
8 | 12 | 8 | 1 | 8 | 3 | 8 | 2 | 8 | 0.13 |
What quantities of A, B, C, and D will Ricardo purchase in maximizing his utility?
Price of good A: $9.00, Units of A: ????
Price of good B: $3.00, Units of B: ?????
Price of good C: $2.00, Units of C: ????
Price of good D: $12.00, Units of D: ????
b. How many dollars will Ricardo choose to save? $?????
c. Check your answers by substituting them into the algebraic statement of the utility-maximizing rule.
( $ Ã ) + ( $ Ã ) + ( $ Ã ) + ( $ Ã ) + $ = $