Assume that a consumer can purchase only two goods: R (recreation) and M (materi

Question

Assume that a consumer can purchase only two goods: R (recreation) and M (material goods). The market price of R is $2 and the market price of M is $1. The consumer spends all her income in such a way that the marginal utility of the last unit of R she buys is 12 and the marginal utility of the last unit of M she buys is 6. a. If we ignore the time it takes to consume R and M, is the consumer maximizing the total utility she obtains from the two goods? _______________ b. Suppose it takes 4 hours to consume each unit of R, 1 hour to consume each unit of M, and the consumer can earn $2 an hour when she works. (1) The full price of a unit of R is $_____________. (2) The full price of a unit of M is $_____________. c. If we take into account the full price of each of the commodities, is the consumer maximizing her total utility? ________ How do you know this? _____________ d. If the consumer is not maximizing her utility, should she increase her consumption of R or of M? ________ Why should she do this? _________________ e. Will she use more or less of her time for consuming R? _____________________

Explanation / Answer

a. Yes, the consumer mamaximizes the total utility that she obtains from the two goods.

b1.The full price of a unit of R is $10.

b2.The full price of a unit of M is $3.

c. No, then consumer is not maximizing her total utility. Since the marginal utility to price ratios are not the same for the two goods.

d. Consumption of M should be increased since the consumption of MU/P ratio is greater.

e. She will be less of her time consuming R

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