osing between the two goods, H and U; your marginal utilities for each are shown
ID: 1201009 • Letter: O
Question
osing between the two goods, H and U; your marginal utilities for each are shown in the table dollar for both our income is $14 and the prices of H and U are $4 and $2 respectively, calculate marginal utilities per ne decima products and fill out appropriate (not shaded) columns in the table below. Keep two digits after Units of H MUh Price SAPrice 52 32 24 12 2. in the table below list the sequence of choices you would make to maximize the total utility and provide the reason for each choice. The first line is pre-filled for you. Fill the rest of the table; don't forget to keep track of the income spent. Note: choose only one product at a time. If MU per dollar are the same for the two products, always choose product H first; this will ensure the uniformity of the answers. Choice Why? Remaining income What unit of what product will be consumed Compare MUs per $ of AFTER choice is made appropriate units $10.00 1st" (see below Unit #1 of H 2nd 3rd 4th 6th 7th 8th 9th 10th I utility per dollar of the first unit of this product is greater than MUu/$(1)-6 -marginal utility per dollar of the first unit of product u 3. Based on your analysis, by the time all income is spent what quantity of each good have you purchased to maximize your utility? Quantity of H at price $4: Quantity of U at price $2: 4. What is your total utility after you exhausted your income? Show calculations Hint: Total utility is a summation of marginal utilities of all consumed units. TU(H)-Explanation / Answer
Optimal choice will be the one where MU per dollar is same for both H and U and the choosen combination is affordable. With income = $14, only three bundles are affordable - (1, 5), (2, 3) and (3, 1).
Note that MU per dollar is same for both goods only when 3 units of H and 1 unit of U is consumed. This is the optimal choice that maximizes utility.
Total utility of H = 40 + 32 + 24 = 96
Total utility of U = 12
Total utility of both the goods = 108
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