Eco 231 -

Eiichiro Kazumori                                                                                                March 18, 2016                        

ECO231

Answer to Quiz 5

Question 1

[pic 1]

Answers.

Step 1. Recall that the marginal utility is defined as “the additional satisfaction a consumer gains from consuming one more unit of a good or service.” [pic 2][pic 3]

Step 2. Also recall that the total utility is “the sum of marginal utility from each unit consumed.”[pic 4]

                [pic 5]

Step 3. Apply these definitions to the question: Gabriell’s total utility from 5 units is 588. Her marginal utility from the 5th unit is 176. The marginal utility is “the change in utility that results from a unit increase in the quantity of a good consumed. [pic 6][pic 7][pic 8]

Question 2.

[pic 9]

Answers.

Step 1. When Jason maximizes the utility between DVD and Spy novels, the marginal utilities per dollar between DVD ad Spy novels must be equal. Otherwise Jason can maximizes his utility by putting his last dollar to the good with the higher marginal utlity per dollar. [pic 10][pic 11]

Step 2. Calculate the marginal utility per dollar for DVD and Spy novels using the spreadsheet:

[pic 12][pic 13][pic 14]

Step 3. We now allocate 60 dollars to the good according to the descending order of the marginal utility per dollar. It will be 2 units of DVD and 2 units of Spy novels.

Question 3.

[pic 17]

Answers[pic 18]

Step 1. From the previous question, we will choose the goods with the highest marginal utility per dollar. [pic 19]

Step 2. We now calculate the marginal utility per dollar using the spreadsheet:

[pic 20][pic 21][pic 22]

Step 3. We now allocate 10 dollars in the descending order of the marginal utility per dollar. The optimal consumption is 6 dollars for song and 4 dollars for cookies. [pic 23][pic 24]

Question 4.

[pic 25]

Answers.

Step 1. The school has the 14 dollars budget. If the school puts everything into oranges, the school can afford 100 oranges per day. If the school puts everything in to grapes, the school can afford 56 grapes per day. [pic 26][pic 27]