Question

 

Hot Dogs	MU hot Dogs	MU/Price	Drink	MU Drink	MU/Price
1	20	10	1	20	20
2	16	8	2	15	15
3	10	5	3	10	10
4	6	3	4	5	5
5	3	1.5	5	3	3
6	2	.6	6	-1	-1

1. Copy and past the table above into your own file, enter the values, write up your answers, and save the file for uploading your answer.
2. Calculate the marginal utility per dollar for each unit of each item.
3. Determine how the $10 should be spent to maximize utility. How many hot dogs will you buy? How many drinks? 4 drinks, 3 hot dogs.
4. What is the total utility from hot dogs? 23
5. What is the total utility from drinks? 50
6. What is the combined total utility from your purchases? 73

Income=$10    Price of a hot dog= $2   Price of a drink= $1

Answer 1

A utility maximising consumer will be maximising utility where marginal utility of each good is proportional to it's price. The consumer will be maximising utility when he purchases that quantity of hot dogs and drinks where marginal utility per dollar spent on each good is equal and also at the same time the consumer is able to spend his entire income on purchase of these two goods.

For hot dogs-

Hot dogs	MU hot dogs	MU / P( MU/ $2)
1	20	10
2	16	8
3	10	5
4	6	3
5	3	1.5
6	2	1

For drinks-

Drinks	MU drinks	MU / P ( MU/$1)
1	20	20
2	15	15
3	10	10
4	5	5
5	3	3
6	-1	-1

The consumer will purchase that many units of hot dogs and drinks where -

MU/P of hot dogs= MU/ P of drinks

And at the same time, the consumer is able to spend his entire income of $10 on purchase of hot dogs and drinks.

From the above table we can see that MU/P of hot dogs and drinks is equal when consumer buys 1 hot dog and 3 drinks, 3 hot dogs and 4 drinks , 4 hot dogs and 5 drinks . The consumer will incur an expenditure on them while buying them-

Price of a hot dog given is $2 and price of a drink is given $1-

Combination	expenditure
1 hot dog and 3 drinks	1 x $2+ 3 x $1= $2+$3= $5
3 hot dogs and 4 drinks	3 x $2 + 4 x $1= $6+$4= $10
4 hot dogs and 5 drinks	4 x $2+ 5 x $1= $8+$5= $13

From the above table we can see that when the consumer purchases 3 hot dogs and 4 drinks, MU / P is equal and also at the same time, he is able to spend his entire income of $10 on purchase of hot dogs and drinks.

The consumer will buy 3 hot dogs and 4 drinks. ( Answer)

Total utility is the sum of marginal utility obtained from additional units. As such, total utility from 3 hot dogs-

Total utility= marginal utility of 1st hot dog + marginal utility of 2nd hot dog + marginal utility of 3rd hot dog

Total utility= 20+16+10= 46

TOTAL UTILITY FROM 3 HOT DOGS is 46 ( answer)

Total utility from 4 drinks = marginal utility of 1st drink + marginal utility of 2nd drink + marginal utility of 3rd drink + marginal utility of 4th drink

Total utility =20+15+10+5= 50

TOTAL UTILITY FROM 4 DRINKS IS 50. ( Answer)

Combined Total utility = total utility from 3 hot dogs + total utility from 4 drinks

combined total utility= 46+50= 96

COMBINED TOTAL UTILITY FROM PURCHASES IS 96 ( answer)