A consumer is deciding how many cups of coffee and how many bus tickets to purch
ID: 1189821 • Letter: A
Question
A consumer is deciding how many cups of coffee and how many bus tickets to purchase. The price of a bus ticket is $1.50 and the price of a cup of coffee is $2. The following table describes the total utility derived from the two goods.
Units of Product
Total Coffees Utils
Total Bus Ticket Utils
First
20
10
Second
32
18
Third
40
25
Fourth
42
31
Fifth
41
35
a) Calculate the marginal utility associated with each unit of each good.
b) If the consumer’s income is $12, find the utility-maximizing combination of goods.
Units of Product
Total Coffees Utils
Total Bus Ticket Utils
First
20
10
Second
32
18
Third
40
25
Fourth
42
31
Fifth
41
35
Explanation / Answer
a)
Coffee
Marginal utility for second unit = 32 - 20 =12
Marginal utility for third unit = 40 - 32 =8
Marginal utility for fourth unit = 42 - 40 =2
Marginal utility for fifth unit = 41 - 42 =-1
Bus ticket
Marginal utility for second unit = 18 - 10 =8
Marginal utility for third unit = 25 - 18 =7
Marginal utility for fourth unit = 31- 25 =6
Marginal utility for fifth unit = 35 - 31 =4
b) utility utility-maximizing combination of goods = 4 units of bus tickets and 3 units of coffee will result in spend of entire income of $12 and highest utility of 71 ( 4 units of bus gives total unitity + 3 units of coffee gives total utility = 31 +40)
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