1. Suppose the utility that Professor Price derives from consuming commodities A

Question

1. Suppose the utility that Professor Price derives from consuming commodities A and B are as follows: College is as follows: Quantity of A Total Utility of A 0 300 550 700 850 900 950 Quantity of B Total Utility of B 1100 2100 3000 3800 4500 5100 a. Suppose Professor Price' income is S250, and the price per unit of commodities A and B are $10 and $100 respectively. If Professor Price is a utility and net benefit maximizer, how many units of each commodity will he purchase? Why? b. If Professor Price' income decreased to $50, how many units of each commodity would he consume if he were a utility and net benefit maximizer? Why?

Explanation / Answer

a) Usually the optimizing rule for utility maintains that MUA/$ = MUB/$. However we find that below in the table there is no such level that is satisfying the rule. The budget has to be exhausted. Using this criteria, we find that the closest combination is A = 4 and B = 2. This implies the consumer is using 4*10 + 2*100 = $240.

b) When income is $50, he has no budget for B so he uses all his income in buying 5 units of A only

QA TUA MUA MUA/$ QB TUB MUB MUB/$ 0 0 0 0 1 300 300 30 1 1100 1100 11 2 550 250 25 2 2100 1000 10 3 700 150 15 3 3000 900 9 4 850 150 15 4 3800 800 8 5 900 50 5 5 4500 700 7 6 950 50 5 6 5100 600 6

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