If Jim is spending all his money while consuming potato chips and pretzels such
ID: 1106402 • Letter: I
Question
If Jim is spending all his money while consuming potato chips and pretzels such that the marginal utility per dollar spent on potato chips is 13 and the marginal utility per dollar spend on pretzels is 20, is he currently maximizing his utility? Why or why not? If not, how can he change his consumption so as to maximize his total utility subject to his budget constraint?
In consumer equilibrium, a person buys 4 cups of coffee at $2 each and 2 muffins at $4 per muffin each day. If the price of a cup of coffee rises to $3, what does economic theory predict will happen to the amount of coffee and muffins this person consumes?
Explanation / Answer
(A) NO he is not maximizing the utility as Marginal utility from potato chip is not equal to Marginal utility from pretzels as 13< 20 ( ( MU potato / price of p < MU of Pretzels / price of pretzels ) so he would consume more of the pretzels quantity that would reduce his reduce utility and leaving the less and less quantity of potato chip , it would increase the utility of potato chip and this would continue till both utility is equal to each other . rise in potato utility and decrease in pretzels utility would equalize and maximize the utility. in this situation income is constant and price of both the goods do not change but his level of consumption regarding good change that would increase and decrease the respective quantity of two goods.
(B)
PC Q PM Q Income 2 4 4 2 16 3 0 4 4 16 consumer will purchase 0 quantity of coffee and 4 units of Muffins to remain in equilibrium.Related Questions
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