2.3 For this problem, assume that Kendrick has $144 to spend on cigars and brand
ID: 1140976 • Letter: 2
Question
2.3 For this problem, assume that Kendrick has $144 to spend on cigars and brandy each month and that goods must be purchased whole (no fractional units). Cigars cost $6 each, and brandy costs $30 per bottle. Kendrick's preferences for cigars an summarized by the following information: d brandy are Cigars Bottles Per No. Per Month TU MU MU/S Month TU MU MU/S 150 270- 360 420- 450- 470 480 28 46 62- 80- 84 86- a. Fill in the figures for marginal utility and marginal utility b. Are these preferences consistent with the law of diminish c. Given the budget of $144, what quantity of cigars and d. Now suppose the price of cigars rises to $8. Which of e. After the price change, how many cigars and how many per dollar for both cigars and brandy. ing marginal utility? Explain briefly. what quantity of brandy will maximize Kendrick's level of satisfaction? Explain briefly the columns in the table must be recalculated? Do the required recalculations. bottles of brandy will Kendrick purchase?Explanation / Answer
a) Marginal utility = Change in Total Units(TU)/ Change in units consumed
Marginal utility per dolar= MU/ price of 1 unit
b) Yes, the preferences are in consistency with the law of diminishing marginal utility as the law states that with every additional unit consumed, the marginal utility derived from each additional unit declines.
c) Maximum statisfaction will be at a point,
MU of cigars/MU of brandy = Price of cigars/Price of brandy
This is at 4 units of cigar and brandy each. (4*$6+4*$30= $144)
d) Marginal utility of cigars per dollar (MU/$) will have to be recalculated.
e) Now he will buy, 3 units of cigars and 4 units of brandy.
3*$8 + 4*$30 = $144
Units per month CIGARS BRANDY MU MU/$ MU MU/$ 1 - - - - 2 46-28/2-1 = 18 18/6 =3 270-150/2-1 = 120 120/30=4 3 62-46/3-2 = 16 16/6=2.67 360-270/3-2 = 90 90/30=3 4 74-62/4-3 =12 12/6=2 420-360/4-3 = 60 60/30=2 5 80-74/5-4 = 6 6/6=1 450-420/5-4 = 30 30/30=1 6 84-80/6-5 = 4 4/6=0.67 470-450/6-5 = 20 20/30=0.67 7 86-84/7-6 = 2 2/6=0.33 480-470/7-6 = 10 10/30=0.33Related Questions
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