Question

Eliza consumes 12 cappuccinos and 8 apple turnovers per week. The price of a cappuccino is $4 each and apple turnovers are $1 each.
2.1 What is the amount of income allocated to cappuccino and apple turnover consumption?
2.2 What is the price ratio (the price of cappuccinos relative to the price of apple turnovers)?
2.3 Explain the meaning of the price ratio you computed.
2.4 If Eliza maximizes utility, what is the ratio of the marginal utility of cappuccinos to the marginal utility of apple turnovers?
2.5 If the price of apple turnovers falls, will Eliza consume more apple turnovers, fewer apple turnovers, or the same amount of apple turnovers? Explain your answer using the rule of equal marginal utility per dollar.

*please show work*

Answer 1

2.1

Eliza consumes 12 cappucinos. The price of a cappuccinos is $4.

Total amount spent = 12 * $4 = $48

So,

The amount of income allocated to cappuccinos consumption is $48.

Eliza consumes 8 apple turnovers. The price of a apple turnovers is $1.

Total amount spent = 8 * $1 = $8

So,

The amount of income allocated to apple turnover consumption is $8.

2.2

The price of a cappuccinos is $4.

The price of a apple turnovers is $1.

Calculate the price ratio -

Price ratio = Price of a cappuccinos/Price of a apple turnovers

Price ratio = 4/1 = 4

The price ratio is 4.

2.3

Price ratio indicates the amount of one good that has to be sacrificed in order to increase the consumption of another good by one unit.

The price ratio in the given case is 4.

This implies that Eliza has to sacrifice consumption of 4 apple turnovers in order to consume one more cappuccino.

2.4

At utility maximizing point, price ratio of two goods consumed equals the ratio of marginal utilities obtained from two goods consumed.

The price ratio is 4.

So,

If Eliza maximizes utility then the ratio of the marginal utility of cappuccinos to the marginal utility of apple turnover is 4.