a) Suppose the marginal utility of good A is 20 and its price is$4, and the marg
ID: 1250321 • Letter: A
Question
a) Suppose the marginal utility of good A is 20 and its price is$4, and themarginal utility of good B is 50 and its price is $5. Theindividual to whom this
information applies is spending $20 on each good.
Is he or she maximizing utility? If not, what should the individualdo to increase
total utility? On the basis of this information can you pick anoptimum combination?
Why or why not?
b) Li, a very careful maximizer of utility, consumes two services,going to the
movies and bowling. She has arranged her consumption of the twoactivities so that
the marginal utility of going to a movie is 20 and the marginalutility of going
bowling is 10. The price of going to a movie is $10, and the priceof going bowling
is $5. Show that she is satisfying the requirement for utilitymaximization. Now
show what happens when the price of going bowling rises to $10.
Principles of Economics by Libby Rittenberg
Explanation / Answer
a. The person is not maximizing utility because the amount ofutility per dollar for good a is 5, while the utility per dollarper good b is 10 (divide marginal utility by price of each good).In order to increase utility, the person should buy less of A andmore of B. The last part of the question depends on the assumptionsyou make. The typical assumption is diminishing marginal utility ofa good, which means the more you consume of it, the lesssatisfaction it gives you. Under this assumption you cannot findthe optimal level of consumption, because you do not know whatmarginal utility of B is at higher levels of consumption and themarginal utility of A at lower levels of consumption. If you were,however, to assume constant marginal utility (not very realistic,but some questions may assume it), then the person will consumeonly B. b. She is satisfying utility maximization because (MU of bowling/Price of bowling) = (Mu of movie/ Price of movie). When the priceof bowling rises to $10, she will consume less bowling and moremovies because (MU of movies/ Price of movies) is now greater than(Mu of bowling/ Price of bowling).
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