Is the dollar equivalent utility gain likely to be greater or less when purchase of half...

Is the dollar equivalent utility gain likely to be greater or less when purchase of half gallon as opposed to gallon quantities is allowed?

A. Greater

B. Less

C. The same

D. Can’t be determined

Expert Solution

Ans:--

If you buy 1$ per gallon then utility gain like to be equal

option C)

Suppose gasoline can be bought only in lumps of one gallon.

Use r1 to denote the most a single consumer would pay for a 1st gallon -- call this reservation price for the 1st gallon.

r1 is the dollar equivalent of the marginal utility of the 1st gallon.

Now that she has one gallon, use r2 to denote the most she would pay for a 2nd gallon -- this is her reservation price for the 2nd gallon.

r2 is the dollar equivalent of the marginal utility of the 2nd gallon.

Generally, if she already has n-1 gallons of gasoline then rn denotes the most she will pay for an nth gallon.

rn is the dollar equivalent of the marginal utility of the nth gallon

r1 + … + rn will therefore be the dollar equivalent of the total change to utility from acquiring n gallons of gasoline at a price of $0.

So r1 + … + rn - pGn will be the dollar equivalent of the total change to utility from acquiring n gallons of gasoline at a price of $pG each.

Rahul Sunny answered 2 years ago

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