Question

Question 3: Tom, after being ambushed by Jerry for so many times, finally develops lower back pain. His primary care physician, Goofy, recommends that he should regularly get both physical therapy and chiropractic services. Tom has a budget of $3,000 (over one year) for both. For this particular amount ($3,000), he has no other use, neither can he exceed this budget.

A) At the optimal choice, how much would Tom spend totally (i.e. the total spending on both physical therapy and chiropractic services)? Why?

B) Currently, physical therapy costs $100/hr and chiropractic costs $60/hr. At the optimal choice, the marginal utility of physical therapy for Tom is 5 (i.e. for each additional hour of physical therapy, Tom gets 5 units of additional "satisfaction".) What is the marginal utility of chiropractic services for Tom? Explain.

C) Now, with the same assumptions as above, Tom needs to reduce the budget to $2,000. What would be the marginal utility for each service at the optimal choice under this lower budget? HINT: You do NOT need to calculate, you can simply "guess" and there are many correct answers. However, your answers should be consistent with the consumer choice theory. In particular, consider two points discussed in the theory: 1) diminishing marginal utility; and 2) the same point you used in part B above.

D) Now with the same assumptions as in A ($3,000 budget), but the price of chiropractic changes to $90/hr due to popularity (price of physical therapy remains $100/hr). How do you expect the optimal choice to change as compared to part B? You do not need to compute any numbers, just explain. What would be the ratio of marginal utilities in this case (for this, you do need a very simple calculation)?

E) Finally, after reading some articles, Tom is now convinced that physical therapy and chiropractic services are perfect substitutes. This means, each hour of physical therapy has the exact same effect as chiropractic service. In this case, how should Tom spend his budgeted money? (HINT: you do NOT need any calculation to answer this question, and your answer needs only one sentence.)

Answer 1