Question

(Consumer Choice and Demand)

Nachos ($5)					pop ($2)
Q	TU	MU	MU/$		Quantity	Total Utility	Marginal Utility	MU/$
0	0				0	0	-	-
1	90				1	60
2	150				2	100
3	180				3	120
4	195				4	130
5	205				5	136
6	210				6	140

1. You have a budget of $11, how would you best spend it to maximize your total utility? What is your total utility for this combination? (Fill in the Chart and determine what combination of nachos and pop would give you the highest utility).

2. If the price of Nachos were to decrease to $3.00 would your utility increase or decrease? Circle the correct answer: Increase or Decrease

Answer 1

Q(Nachos)	TU	MU	MU/P	Q(Pop)	TU	MU	MU/P
1	90	90	18	1	60	60	30
2	150	60	12	2	100	40	20
3	180	30	6	3	120	20	10
4	195	15	3	4	130	10	5
5	205	10	2	5	136	6	3
6	210	5	1	6	140	4	2

MU=change in total utility

MU/P = MU/price of the good

Budget = 11

To maximize total utility,s pend the budget so that MU/P for nachos = MU/P for Pop

so, one should buy 3 units of Popcon and 1 unit of Nachos

When the price of Nachos decreases to 3

Q(Nachos)	TU	MU	MU/P	Q(Pop)	TU	MU	MU/P
1	90	90	30	1	60	60	30
2	150	60	20	2	100	40	20
3	180	30	10	3	120	20	10
4	195	15	5	4	130	10	5
5	205	10	3.33	5	136	6	3
6	210	5	1.67	6	140	4	2

Now, one should buy 2 units of each good

Utility before = 120+90 = 210

Utility after = 150+100 = 250

So, Utility increases