Question

Assume you have only three goods to choose from:

• Good “A” Price is $10.00 per unit
• Good “B” Price is $12.00 per unit
• Good “C” Price is $3.00 per unit

Also assume you have $76.00 of income to spend and have the following marginal utility expectations for the goods.

Unit	Marginal Utility Good A	MU/$	Unit	Marginal Utility Good B	MU/$	Unit	Marginal Utility Good C	MU/$
1	100		1	60		1	21
2	80		2	48		2	18
3	60		3	36		3	15
4	40		4	24		4	12
5	20		5	12		5	9
6	10		6	6		6	6

Complete the table by computing the MU/P for each good and deciding how you, a rational consumer would spend their budget.

How much of each good would you purchase if your income rose to $116?

Answer 1

a) Budget = 76

Price of Good A = 10

Price of Good B = 12

Price of Good C = 3

Margin utility per dollar = margin utility/price of the good

Quantity	Marginal utility from Good A	Marginal utility per dollar from Good A (P=10)	Marginal utility from Good B	Marginal utility per dollar from Good B (P=12)	Marginal utility from Good C	Marginal utility per dollar from Good C (P=3)
1	100	10	60	5	21	7
2	80	8	48	4	18	6
3	60	6	36	3	15	5
4	40	4	24	2	12	4
5	20	2	12	1	9	3
6	10	1	6	0.5	6	2

selection of item would be in decreasing order of their marginal utility per dollar

The sequence of selection of items, we would stop where the budget gets over

1. 1st unit of Good A, margin utility per dollar = 10, price = 10

2. 2nd unit of Good A, margin utility per dollar = 8, price = 10

3. 1st unit of Good C, margin utility per dollar = 7, price = 3

4. 3rd unit of Good A, margin utility per dollar = 6, price = 10

5. 2nd unit of Good C, margin utility per dollar = 6, price = 3

6. 1st unit of Good B, margin utility per dollar = 5, price = 12

7. 3rd unit of Good C, margin utility per dollar = 5, price = 3

8. 4th unit of Good A, margin utility per dollar = 4, price = 10

9. 2nd unit of Good B, margin utility per dollar = 4, price = 12

10. 4th unit of Good C, margin utility per dollar = 4, price = 3

After selection of 4 units of Good A, 2 units of Good B and 4 units of Good C, the budget would be over

4*10+2*12+4*3 = 76

If income rose to 116, then in addition to the above selection, the following units will be selected,

11. 3rd unit of Good B, margin utility per dollar = 3, price = 12

12. 5th unit of Good C, margin utility per dollar = 3, price = 3

13. 4th unit of Good B, margin utility per dollar = 2, price = 12

14. 5th unit of Good A, margin utility per dollar = 2, price = 10

15. 6th unit of Good C, margin utility per dollar = 2, price = 3

After selection of 5 units of Good A, 4 units of Good B and 6 units of Good C, the budget would be over

5*10+4*12+6*3 = 116