Question

In these brief short-answer problems, provide examples from your own life which apply to these economic questions: Name a time you were indifferent between two goods. What were they? What made you indifferent between them? Name a time there was a change (higher or lower) in your budget for two goods. What were they? How did the change affect your consumption choices? Name a time you believe you applied the utility maximization rule. What were the goods or services you chose to maximize your utility? How did this relate to your budget constraint?

Answer 1

A time when I was indifferent between two goods was during my exam times when I was feeling very sleepy and I wanted to stay awake at night and study. The two goods were tea and coffee. The reason I was indifferent between them was that both of them are substitutes of each other, both of them contains caffeine and antioxidants which helps in boosting up energy, which would help me to study hard during my exam times without feeling sleepy.

A time when there was a change in my budget for two goods was during my birthday when I got more than my usual pocket money from my parents. So, my budget got higher and the two goods were fruits and burgers. When my budget increased, I had two consumption choices, either to eat healthy during my birthday and have fruits or have fastfood such as burgers during my birthday, and I choose to eat healthy during my birthday so I had fruits instead.

The time when I had applied the utility maximization rule was during my birthday itself, when I had to choose what fruits I needed to buy with my limited budget. I had a budget of $10 and I wanted to consume both apples and oranges.Now the utility maximization rule states that MU_x/P_x = MU_y/P_y. The price of oranges was $2 and the price of apples was $4. Assuming utility can be measured cardinally, I had the following table,

Number	Utility of Oranges	Utility of Apples	MU of Oranges	MU of Apples
0	0	0	0	0
1	15	30	15	30
2	25	50	10	20
3	30	60	5	10

When the number of oranges is 2 and the price of oranges is $2 , MU_x/P_x = 10/2 = 5,

When the number of apples is 2 and the price of apples is $4 , MU_x/P_x = 20/4 = 5,

So, the utility was maximised when the number of oranges was 2 and the number of apples was 2 with my limited budget of $10 ($2 for oranges * 2 + $4 for apples * 2 = $4 + $6 = $10). This is how it related to my budget constraint.