Question

Arnold Ziffel has $20 per week to spend on any combination of pineapples and green tea. The price of a pineapple is $4 and the price of a bottle of green tea is $2. The table below shows Arnie's utility values. Complete the table and use the table to answer the questions.

Quantity of Pineapples	Total Utility	Marginal Utility	Marginal Utility per dollar	Quantity of green tea	Total Utility	Marginal Utility	Marginal Utility per dollar
1	32	32	8	1	28
2	52			2	46
3	64			3	54
4	68			4	60
5	70			5	64
6	71			6	66	2	1
7	71			7	67

1. Suppose Arnold purchases 4 pineapples and 2 bottles of green tea. Is he consuming the optimal consumption bundle? If so, explain why. If not, what combination should he buy and why?

Answer 1

Quantity of pineapples	Total utility	Marginal utility	Marginal utility per dollar	Quantity of gree tea	Total utility	Marginal utility	Marginal utility per dollar
1	32	32	8	1	28	28	14
2	52	20	5	2	46	18	9
3	64	12	3	3	54	8	4
4	68	4	1	4	60	6	3
5	70	2	0.5	5	64	4	2
6	71	1	0.25	6	66	2	1
7	71	0	0	7	67	1	0.5

1.

Arnold is exhausting his $20, but he is not consuming the optimal bundle as optimal bundle is selected on the basis of highest marginal utility per dollar to maximize the total utility. It is not achieved by the bundle of 4 pineapples and 2 bottle of green tea.

On the basis of marginal principle,

The 4 units of green tea and 3 units of pineapple should be selected in $20.

Total utility with this combination = 60 + 64 = 124

Total utility as per the combination stated in question = 68+46 = 114

So, the combination of the 4 units of green tea and 3 units of pineapple is optimal bundle