Question

Objectives

• Determine a budget for personal consumption
• Explain the correlation between marginal utility and consumer's demand curve
• Apply marginal utility theory to the paradox of value

Assignment Overview - In this assignment, you will construct a budget line for your spending habits and analyze the marginal utility of items.

Deliverables - A one-page (250-word) document

Step 1 Answer questions on your spending habits.

In a one-page (250-word) document, answer the following questions:

What kinds of things do you buy on a daily or weekly basis?

How much do these things cost?

Do the prices fluctuate, or are the prices usually stable (inelastic)?

Think about your spending habits in preparation for creating a budget line.

Step 2 Graph a budget line.

In the same document, use the information gathered in Step 1 to construct a budget line:

Choose two items that you use on a daily basis and purchase frequently.

Compare the quantities of each based on how much you can reasonably afford them by using a budget line.

Use the following as a guide in developing your graph:

Using (free) online graphing software such as shapes in Microsoft Word or other software create a graph.

Follow the instructions on the website to learn how to create and manipulate the graph(s).

Save the graph(s) to your computer as a jpeg or .doc file.

If not in .doc format, copy and paste the jpeg into the assignment document that you deliver to your instructor.

Step 3 Analyze the marginal utility.

In the same document, analyze the marginal utility using the items and information from Step 2:

Analyze the marginal utility of the two items when the quantity of these products increases as they become your possessions.

Then choose a third item that you truly cannot live without. Assess the marginal utility of this item until you reach the point where there is no utility (marginal utility = 0).

What is the correlation between marginal utility and your demand curve?

How does marginal utility apply to the paradox of value?

Include your reaction and response to how constructing the budget line and marginal utility analysis makes you feel about the three items you consume on a frequent basis.

Answer 1

Step 1:

Most of the income is spent on groceries, and food items. Food items are bought on a daily basis and grocery items on a weekly basis. The cost of food items on a daily basis is around 400Rs and the cost of groceries comes up to 2500Rs weekly. The prices of the food and groceries don't fluctuate much, even though there are slight fluctuations. There will an increase or decrease usually doesn't affect the consumption much as these are considered as essential goods.

Step 2:

In order to create the Budget line, the total income is identified as 10,000Rs. The two items taken for the Budget line is Chicken and Apples. In order to construct the budget curve, we have to identify the points of the axis.

Income = 10,000Rs

Good X = Chicken

Good Y = Apples

Price of Good X = Rs 200 per kg

Price of Good Y = Rs 100 per kg

Quantity of Good X = 10,000/200 = 50

Quantity of Good Y = 10,000/100 = 100

The budget curve of Good X and Good Y

The above budget line AB shows the combination of chicken and apples with the available income of Rs 10,000. If the entire income is consumed on chicken, 50 units of chicken can be bought, and if the entire income is spent on apples, 100 units of apples can be bought.