Question

Your local pizzeria is having a special offer on medium pizzas. The first pizza will cost you $10, but if you buy a second pizza it will only cost you $5. What aspect of consumer theory does this illustrate?

Explain why a rational consumer does not spend all of her income buying only her favourite product.

a) Suppose that Daniel is willing to pay a maximum of $5 for his first slice of pizza. For each additional slice, he would be prepared to pay up to 50 cents less. If Daniel could obtain the pizza for free, how many slices would he eat?

b) If the price of a slice of pizza happened to be $2, how many slices would he purchase (assuming his budget allowed it)? What would be his total consumer surplus as a result?

Number of slices:  

Consumer surplus: $

Answer 1

Ans -: The first pizza will cost $10 but second pizza will cost $5. This illustrates the Diminishing marginal utility aspect of consumer theory. As the units of a product increases , the marginal utility from that product declines and the consumer is willing to pay less for every additional unit.

A rational Consumer does not spend all the income on buying her favourite product because a rational consumer spreads her income among various goods in such as way so that the marginal utility derived from every good/product is same. This is also known as Law of equi-marginal utility.

a) We will construct a table to see the behaviour of consumer-:

Price($)	Quantity of pizza slice
5	1
4.5	2
4	3
3.5	4
3	5
2.5	6
2	7
1.5	8
1	9
0.5	10
0	11

If Daniel could obtain pizza for free i.e. Price paid = $0.

As evident from the table at price = 0 , Daniel will eat 11 slices of pizza.

b) If price = $2 , Daniel would purchase 7 slices of pizza (see table) .

Number of slices : 7

Consumer surplus =1/2( Willingness to pay - actual price )(number of slices bought)

   = 1/2 (5-2)7

   = 1/2 (3)7

   = 1/2 (21)

   = $10.5