2 FINAL EXAM Page 12 of 13 er four out of the following five short problem quest

Question

2 FINAL EXAM Page 12 of 13 er four out of the following five short problem questions. (20 marks) Use the following to answer question 1: Table: Slices of Pizza Slices of PizzaTotal Cost Cost Total Benefit Marginal Beneit $12 Marginal 0 S o $ 0 17 20 12 16 5 1. (Table: Slices of Pizza) Look at the table Slices of Pizza. The table shows the total cost incurred and total benefit received from consuming additional slices of pizza. Complete the table and determine the optimal number of slices you should eat.

Explanation / Answer

Following formula has been used:

MCn = TCn - TCn-1

TCn = MCn + TCn-1

MBn = TBn - TBn-1

TBn = MBn + TBn-1

Where n is the number of pizza slices.

You should stop the consumption at second slices of pizza because the third slice of pizza has the marginal cost of $4 and marginal benefit of $3. Since the marginal benefit is less than to marginal cost for the more than 2 pizza slices. So, it is not rational decision to consume more than 2 pizza slices.

Thus, the optimal number of slices consumer should eat is 2.

Slices of Pizza Total Cost Marginal Cost Total Benefit Marginal Benefit 0 0 xxxxxx 0 xxxxxx 1 4 (4-0) = 4 (0+12) = 12 12 2 (4+4)=8 4 17 (17-12) = 5 3 12 (12-8) = 4 20 (20-17) =3 4 16 (16-12) = 4 22 (22-20) =2 5 (16+4) =20 4 (22+1) =23 1

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