Question

Total and marginal utility for bread and cereal
Quantity (loaves of bread)	Total Utility	Marginal Utility	Marginal Utility per Dollar ($4)	Quantity (boxes of cereal)	Total Utility	Marginal Utility	Marginal Utility per Dollar ($4)
0	0			0	0
1	70			1	50
2	125			2	90
3	165			3	120
4	190			4	140
5	200			5	160

1. The table below contains data about your food budget, and assumes you have $20 to spend. Fill out the entire table, assuming bread is $4 per loaf and cereal is $4 per box

a. In the space below (turn your paper sideways to draw), illustrate the law of diminishing marginal utility for bread

b. If this consumer wants to maximize their utility, they will use the _________________________ rule to arrive at the purchase of _______ loaves of bread and _______ boxes of cereal. Show your work for this analysis below

c.Now, the price of cereal drops to $2 per box. This consumer will buy _______ breads and _______ cereals. Complete the work below and draw this consumer’s demand curve for cereal:

Answer 1

Utility maximizing condition is when marginal utility per dollar is equal for both goods.

Q (loaves of bread)	TU	MU= Change in TU	MU/$4	Q (Boxes of cereal)	TU	MU= Change in TU	MU/$4	MU/$2
0	0	-	-	0	0	-	-	-
1	70	70	17.5	1	50	50	12.5	25
2	125	55	13.75	2	90	40	10	20
3	165	40	10	3	120	30	7.5	15
4	190	25	6.25	4	140	20	5	10
5	200	10	2.5	5	160	20	5	10

(a) By plotting marginal utilities ,we get the marginal utility for both goods as shown below: MU is decreasing as quantity increases, this implies law of diminishing marginal utility.

(b) If price of bread = $4 per loaf and price of cereal = $4 per box. Income= $20.

Then , marginal utility per dollar is equal for both goods when B=3 loaves and C= 2 box.
($4)(3)+ ($4)(2)= $20 (i.e equal to income which satisfies the budget constraint). Hence, If this consumer wants to maximize their utility, they will use the MRS=MUb/MUc= Pb/Pc , MUb/Pb= MUc/Pc rule to arrive at the purchase of 3 loaves of bread and 2 boxes of cereal.

(c) If price of cereal falls to $2 .

Then , marginal utility per dollar is equal for both goods when B=3 loaves and C= 4 box.
($4)(3)+ ($2)(4)= $20 (i.e equal to income which satisfies the budget constraint). Hence, this consumer will buy  3 loaves of bread and 4 boxes of cereal.