Question

1. Assume that Tom spends $190 on books and movies each month. Movies cost $10 each and books cost $ 25 each. Tom’s total utility for books and movies are presented in the following table.

Movies				Books
No. /month	TU	MU	MU/$	No. /month	TU	MU	MU/$
0	0	-------	----------	0	0	---------	-----------
1	22			1	50
2	42			2	80
3	52			3	100
4	57			4	110
5	60			5	116
6	62			6	121
7	63			7	123

A. Fill the missing figures for marginal utility and marginal utility /$ for both movies and books.

B. Are these preferences consistent with the law of diminishing marginal utility? Why or why not?

Answer           : Yes / No

Reason:……………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………..

C. Given Tom’s income ($190), what combination of books and movies will maximize Tom’s utility during a month?

Order of choice	Choice	Price	Total cost
First Choice
Second Choice
Third Choice
Forth Choice
Fifth Choice
Sixth Choice
Seventh Choice
Eighth Choice
Ninth Choice
Tenth Choice
Eleventh Choice

Number of movies Tom will see in a month                          :………………… …………………

Number of books Tom will buy in a month                           :………………… …………………

Answer 1

A. The table:

  

B. Yes, the preferences consistent with the law of diminishing marginal utility.
reason: The MU (Marginal utility) decreases as the units of consumption go on increasing.  

C. Order of preference:

Number of movies Tom will see in a month = 6  

Number of books Tom will buy in a month = 5

Tom will choose according to MU/$ of the two goods. Movies has the highest MU/$ =  2.2. So, that is his first choice. He proceeds according to the MU/$. After the tenth choice, he is left with $15 (190 - 175 = 15). He is also faced now with equal MU/$ of 0.2 for the 6th unit of movie and 6th unit of book. But he cannot buy a book as it costs $25, and he is shy of $10 for a book. So, he buys a movie and spends $10 more. Now he is left with $5.