Question

   Given the following information on quantity consumed of caviar and total utility for Ryan Andrews; answer the following:

Quantity (in ounces)	Total Utility (in dollars)
1	50
2	70
3	85
4	95
5	90

a) What is the Marginal Utility for each additional ounce of caviar?

b)      At a price of $16 an ounce, how many ounces of caviar should James Ryan purchase to optimize his satisfaction?

c)       What is his consumer surplus at this optimal level of consumption?

Answer 1

Answer

a) The marginal utility is the change in total utility for the change in one additional unit of consumption.

Quantity(in ounces)	Total Utility(in dollars)	Marginal Utility
1	50	-
2	70	20
3	85	15
4	95	10
5	90	5

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b) 2 ounces of caviar.

At a price of $16 an ounce, James Ryan should purchase 2 ounces of caviar to optimize his satisfaction.

The consumer should purchase a good as long as the marginal utility of the good is greater than the price the consumer pays per unit of the good. When James Ryan purchases 2 ounces of caviar, his marginal utility is 20, which is greater than $16. For 3 ounces caviar, the marginal utility is 15, which is less than $16.

So, at price $16 an ounce, James Ryan should purchase 2 ounces of caviar.

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c) 4 units.

The consumer surplus is the difference between the maximum price, the consumer is willing to pay for a good, and the price the consumer is actually paying for the good.

The maximum price the consumer is willing to pay for a good depends on the marginal utility of the good.The maximum price the consumer is willing to pay for a good is equal to its marginal utility.

Consumer surplus = Marginal utility - price

At the optimal level of consumption, i.e.,  for 2 ounces of caviar, James Ryan's marginal utility is 20,i.e., the maximum price he can pay for this optimal level is $20; and the price he actually pays is $16 an ounce.

So, James Ryan's consumer surplus = 20 - 16 = 4 units

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