The meal plan at University A lets students eat as much as they like for a xed f

Question

The meal plan at University A lets students eat as much as they like for a xed fee of $500 per semester. The average student there eats 250 pounds of food per semester. University B charges students $500 for a book of meal tickets that entitles the student to eat 250 pounds of food per semester. If the student eats more than 250 pounds, he or she pays extra; if the student eats less, he or she gets a partial refund of $.50 per pound not consumed (of the 250 pounds bought). If students are rational, at which university will average food consumption be higher? Include a graph with marginal benet and marginal cost curves supporting your explanation.

Explanation / Answer

If the students are rational, the food consumption at university A will be higher on average. This is so, because the $500 they pay for their meal plan is a sunk cost, so the marginal cost of an extra meal is zero. With the students at university B, the cost of an additional meal is the $2 coupon they would otherwise get a refund on, making them more careful with the number of meals they consume. This said, the students at university A will eat unit their marginal cost of an extra meal is $0, while the students at university B will eat until their marginal cost of an extra meal is $2, meaning that the average food consumption at university A will be higher on average.

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