Problem Set 1 ECO 105: 1. Once per week, Mr. Doingitwrong purchases a six-pack o
ID: 1136272 • Letter: P
Question
Problem Set 1 ECO 105: 1. Once per week, Mr. Doingitwrong purchases a six-pack of grape soda and puts it in his refrigerator for his two children. The six cans are all gone on the first day. Mr. Doneright also purchases a six-pack of grape soda once per week for his two children. However Mr. Doneright tells his children that they may each drink no more than three cans. Suppose the children in both households use cost-benefit analysis each time they decide whether to drink a can of soda. Use the cost-beneft principle to explain why the soda lasts longer at Doneright's house than at Doingitwrong's house.Explanation / Answer
The reason why grape soda lasts long in Doneright's house than compare to Doingitwrong's house is that there is a restriction in the Doneright's house which is not there in the Doingitwrong's house. That is the kids of Doingitwrong have no restriction, so each of them will try to maximize their respective utility so each one them will try to drink as much as possible, so they will try to finish the soda as early as possible and as fast as possible so that the other will not be able to do so. But in the Doneright house, the case is different. Each kid has a limit, which is three soda. So they will not hurry because they know that at the end of the day there will be still some soda there. So they will be the one to maximize their benefit and their soda will last long.
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