(10) Consider the following three schedules, which specify Jack\'s preferences o

Question

(10) Consider the following three schedules, which specify Jack's preferences over two commodities, coffee (C) and donuts (D).<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Utility = 1

C  D

1  1

2  0.5

4  0.25

Utility = 4

C  D

1  2

2  1

4  0.5

Utility = 16

C  D

1  3

2  2

4  1

True or False? Explain.

(a) (3) The marginal utility of donuts diminishes as donut consumption increases, holding coffee consumption constant.

(b) (3) The marginal utility of coffee diminishes as coffee consumption increases, holding donut consumption constant.

(c) (4) An increase in the quantity consumed of coffee increases the marginal utility of donuts.

Explanation / Answer

a) FALSE

Marginal Utility(2-1) = 4-1 = 3

Marginal Utility(3-2) = 16-4 = 12

a) FALSE

Marginal Utility(2-1) = 4-1 = 3

Marginal Utility(4-2) = (16-4)/2 = 6

a) TRUE

Coffee = 1

Marginal Utility(2-1) = 4-1 = 3

Marginal Utility(4-2) = (16-4)/2 = 6

Coffee = 2

Marginal Utility(1-0.5) = (4-1)/0.5 = 6

Marginal Utility(2-1) = (16-4)/1 = 12

Coffee = 4

Marginal Utility(0.5-0.25) = (4-1)/0.25 = 12

Marginal Utility(1-0.5) = (16-4)/0.5 = 24

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