Question

The following table shows total benefit for different quantities of good A, good B, and good C. Initially, the price of good A is $5, the price of good B is $6, the price of good C is $7, and the consumer’s income is $42.

	Good A			Good B			Good C
Quantity	Total Benefit	Marginal Benefit	MB/P	Total Benefit	Marginal Benefit	MB/P	Total Benefit	Marginal Benefit	MB/P
0	0			0			0
1	50			63			70
2	95			122			133
3	134			176			188
4	166			224			234
5	190			265			270
6	205			298			295
7	210			322			308

1. Complete the marginal benefit and the MB/P columns (round your answers to 2 decimal places).

2. Given the initial prices and income above, what is the optimal bundle (Briefly explain how you arrived at your answer)? What is the total benefit derived from the bundle?

3. Now imagine the price of good C falls to $4 and the consumer’s income rises to $48 at the same time. Which column in the table above has to be recalculated? Indicate the relevant good and column and fill in the recalculated values in the space below (round all answers to 2 decimal places).

Quantity
0
1
2
3
4
5
6
7

4. With the new price of $4 for good C and the new income of $48, what is the new optimal bundle? What is the total benefit derived from the new bundle?

Answer 1

1. The table:

2. the optimal bundle:

Optimal bundle: 42 = 2A+ 3B + 2C

reason: THe consumer will consume wher the ast dollar spent on each of these 3 goods is equal. That is where MB/P of all 3 goods is the same Here, MB/Pa+MB/Pb+MB/Pc = 90 when 2 units of A, 3 units of B and 2 units of C are consumed.
Total benefit = 95+176+133 = 404

3. If price of Good C decreases to $4, MB/P of good C needs to be recalculated.
The values:

4 The neww optimal bundle:

The new bundle will be:  48 = 2A + 3B + 5C

Here again, MB/Pa = MB/Pb = MB/Pc = 90 is when units of A, 3 units of B and 5 units of C are consumed with new income $48.

Total benefit derived = 95 + 176 + 270 = 541