Question 4 Keegan has $30 to spend on Pita Wraps and Bubble Tea. The price of a
ID: 1209532 • Letter: Q
Question
Question 4
Keegan has $30 to spend on Pita Wraps and Bubble Tea. The price of a Pita Wrap is $6 and the price of a glass of Bubble Tea is $3. Table 1 shows his total utility from different quantities of the two items.
Quantity of Pita
Wraps
Total Utility
Marginal
Utility
Marginal
Utility per Dollar
Quantity of Bubble Tea
Total Utility
Marginal
Utility
Marginal
Utility per Dollar
1
60
1
40
2
102
2
70
3
132
3
91
4
144
4
106
5
144
5
112
6
138
6
115
7
128
7
115
a. Complete the table by filling in the blank spaces. (5 Marks)
b. Suppose Keegan purchases 2 Pita Wraps and 6 glasses of Bubble tea. Is he consuming the optimal consumption bundle? If so, explain why. If not, what combination should he buy and why? (5 Marks)
Quantity of Pita
Wraps
Total Utility
Marginal
Utility
Marginal
Utility per Dollar
Quantity of Bubble Tea
Total Utility
Marginal
Utility
Marginal
Utility per Dollar
1
60
1
40
2
102
2
70
3
132
3
91
4
144
4
106
5
144
5
112
6
138
6
115
7
128
7
115
Explanation / Answer
a) Following formulas are used to complete the table:
Marginal utility = Change in Total utility / Change in Units consumed
Marginal utility per dollar = Marginal utility / Dollars spend on additional consumption = MU/price per unit
b) At optimal consumption marginal utility per dollars are equal of each good consumed. Here is Keegan purchases 2 pita wraps then his MU per dollar for this good is 7 and MU per dollar of consuming 6 bubble tea is 1. Hence it is not optimal consumption. The optimal combination is 3 units of Pita wraps and 4 units of Bubble tea. As here the MU per dollar of each good is equal and the budget is totally exhausted giving maximum utility.
Qty Pita Wraps TU MU MU per dollar Qty Bubblt tea TU MU MU per dollar 1 60 60 10 1 40 40 13.33333333 2 102 42 7 2 70 30 10 3 132 30 5 3 91 21 7 4 144 12 2 4 106 15 5 5 144 0 0 5 112 6 2 6 138 -6 -1 6 115 3 1 7 128 -10 -1.666666667 7 115 0 0Related Questions
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