Question

Mr Rabbit, Mr Bear and Mr Fox go to town. A new bakery has just opened, and in an attempt to attract awareness, it is offering free unlimited samples of its chocolate chip cookies. However, the free cookies can only be consumed in-store (you cannot take them home).

Mr. Rabbit ate 10 cookies and then stopped

Mr. Bear ate 25 cookies before he stopped, then bought a milkshake.

Mr. Fox had 30 cookies and then stopped.

The owner of the bakery, Mr. Turtle, said “I am glad you like the cookies!” Here’s is a funny story about my muffins...last week, I dropped the price on muffins 20% but I only sold 20% more! In the end, the total muffin sales were the same as if they were normally priced!!

Briefly explain your answer to the questions below:

1. Who got to zero marginal utility for the cookies first?
2. Mr Bear still was not full after 25 cookies, since he paid for a milkshake. Why would he pay for a milkshake when he could keep eating cookies for free?
3. What kind of price elasticity is Mr Turtle seeing on his muffins?

Answer 1

1. Mr Rabbit got to zero marginal utility for the cookies first. This can be seen as he stopped after eating 10 cookies but others continued. So a person stops consuming a good or service if he/she gets no utility from it.

2. Mr Bear still was not full after 25 cookies, since he paid for a milkshake. He paid for a milkshake when he could keep eating cookies for free because the marginal utility derived from consuming cookies after eating 25 cookies may have become zero but since he had not consumed milkshake it must have given him some positive utility or satisfaction.

3. Mr. Turtle is seeing a Unitary price elasticity i.e. the value of price elasticity for his muffins is 1, it means that a proportionate change in price brings about an equal proportionate change in quantity demanded. This can be seen from the question as it is said that when he dropped the price by 20% there was about 20% increase in sales, hence price elasticity= 20/20= 1