Question

Suppose that Kevin is a 10 years old boy. He is at the mall with his mom, and she gives him some money to get food from the food court. At the food court there is a hamburger place, and an ice cream shop.

In the following table, I will show you Kevin's Total Utility for each quantity of Hamburgers and ice cream.

Hamburgers ($2)					Ice Cream ($1)
Quantity	Total Utility	Marginal Utility	MU/P		Quantity	Total Utility	Marginal Utility	MU/P
0	0	-	-		0	0	-	-
1	20				1	29
2	34				2	46
3	44				3	53
4	47				4	55
5	47				5	56
6	42				6	56
7	32				7	52

1) Complete the table, showing the Marginal Utility for each hamburger and ice cream. (for example, the first hamburger gives Kevin the marginal utility of 20, and the second gives him the marginal utility of 14.

2) Complete the table, showing the Marginal Utility Per Dollar of each hamburger and Ice Cream (ex. the first hamburger gives Kevin a marginal utility of 20, but costs $2, so the MU/P = 10).

3) Suppose that Kevin's mom gives Kevin $7 to spend in the food court. Please show me where kevin spends his money. (i.e. What does he buy first, second, third) and what his Total Utility is after each purchase.

Answer 1

Let hamburger be good 1 and ice cream be good 2

Marginal utility = Change in total utility/ Change in Quantity

Q1. TU1. MU1. MU1/P1. Q2. TU2   MU2. MU2/P2

0. 0. - - 0. 0. - -

1. 20. 20. 10. 1. 29. 29. 29

2. 34. 14. 7. 2. 46. 27. 27

3. 44. 10. 5. 3. 53. 7. 7

4. 47. 3. 1.5. 4. 55. 2. 2

5. 47. 0. 0. 5. 56. 1. 1

6. 42. -5.   -2.5. 6. 56. 0. 0

7. 32. -10. -5. 7. 52. -4. -4

c) He will buy combination of hamburgers and icecream such that margina utility per dollar is same for both. Thus, he will buy 2 units of hamburgers and 3 units of icecream for $7 as bot these combinations have marginal utility per dollar equal to 7. Thus, his total utility is 87 (34+53).

He will first buy a unit of icecream with higher MU/P, then he will but an icecream again because MU/P is still higher than any units of hamburgers, then he will buy an icecream again with MU/P still higher than any unit of hamburgers, then he’ll but a hamburger because MU/P is now higher than the additional unit of ice cream’s and at last he will but one more unit of burger with MU/P higher than the subsequent unit of icecream.

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