Question

Using a set of data, you will graph a budget constraint and express it as an algebraic equation. You will also determine the combination of two goods that gives the maximum total utility.

Instruction: Suppose that as a consumer you have $34 per month to spend for munchies, either on pizzas which cost $6 each or on Twinkies which cost $4 each. Suppose further that your preferences are given by the following total utility table.

Count	1	2	3	4	5	6	7
Pizzas	60	108	138	156	162	166	166
Twinkies	44	76	100	120	136	148	152

First, graph the budget constraint with Pizzas on the horizontal axis and Twinkies on the vertical axis. What are the intercepts and slope of the opportunity cost? Express the budget constraint as an algebraic equation for a line.

Next, use the utility maximizing rule to identify the consumer equilibrium, that is, what combination of Twinkies and Pizzas will maximize your total utility. Confirm and explain that the consumer equilibrium generates the highest combined total utility of any affordable combination of goods.

Make sure to:

Accurately graph the budget constraint

Correctly identify the intercepts

Graph the slope as the opportunity cost

Calculate the consumer equilibrium using the utility maximizing rule

Explain the process used to confirm that the consumer equilibrium generated the highest combined total utility of any affordable combination of goods

Answer 1

Utility Maximization rule states that consumers decide to allocate their budget so that the last dollar spent on each product purchased yields the same amount of extra marginal utility i.e. marginal utility per unit dollar shall be equal.

Count   1   2   3   4   5   6   7
MU_Pizza   60   48   30   18   6   4   0
MU_Twinkies   44   32   24   20   16   12   4
Count   1   2   3   4   5   6   7
MU_Pizza   10.00   8.00   5.00   3.00   1.00   0.67   0.00
MU_Twinkies   11.00   8.00   6.00   5.00   4.00   3.00   1.00
2*6 + 2*4 = 20
3*6 + 4*4 = 32
4*6 + 6*4 = 48
Therefore the possible combination is 3 units of pizza and 4 units of twinkies. Total utility = 258