Solutions to for Topic 5: Utility and Demand

Question 5.1

The marginal utility of the 2nd roller coaster ride is

    (A)      25

    (B)  50

    (C)  75

    (D)  100

    (E)  200

Solution 5.1

The correct answer is (D) The total utility of the first roller coaster ride is 200. The total utility of the second roller coaster ride is 300. So the change in total utility, which is the marginal utility of the second ride is 100

Question 5.2

Brian gets 18, 23, and 25 units worth of total utility from consuming 10, 11, and 12 raw oysters, respectively, and the price per oyster is 25 cents.  Thus, one can infer that Brian

        A)           is utility maximizing.

        B)            is not utility maximizing.

        C)            is experiencing diminishing marginal utility.

        D)           should NOT consume any more oysters.

        E)            has consumed too many oysters.

Solution 5.2

The correct answer is (C). The marginal utility of the 11^th unit is 5 and the marginal utility of the 12^th unit is 2, implying diminishing marginal utility.

Question 5.3

For two goods, A and B, MU_A/P_A= 10 and MU_B/P_B=12.  The consumer should

        A)           leave their choices as they are.

        B)            purchase less of A and B.

        C)            purchase less of A and more of B.

        D)           purchase more of A and less of B.

        E)            purchase more of A and B.

Solution  5.3

The correct answer is (C).

Since MU_B/P_B is larger than MU_A/P_A, spending $1 more on B gives more utility than spending $1 more on A.

The consumer should buy more B and less A to maximize total utility.

Question 5.4

Complete the table below and comment on the changes in total utility and marginal utility as consumption of hamburger increases:

Units             Total Utility         Marginal Utility

0                      0

1                      103                         103

2                      158                         55

3                      172                         14

4                      165                         -7

Question 5.5

Jessy's marginal utility of watching movies and marginal utility of eating out each month in utils are represented in the following table.

She spends $100 every month for entertainment, the price per movie is $10 and price per eating out is $20.  What is Jessy's optimal combination of movies and eating out?

Solution 5.5

Optimal combination is : (MU/P)_M = (MU/P)_D

Compute 2 columns of   MU/P for both goods

The possible optimal combinations are: (1M, 3D) and (2M, 4D)

1M and 3D needs $70

2M and 4D needs $100

Based on the budget, the optimal consumption combination is 2 movie and 4 dinner.

Movies/mth        MU Movies                      MU / $ (m)                     Eating/mth                       MU eating                      MU/$ (eat)

1                                 60                                          6                                             1                                             150                                       7.5

2                                 50                                          5                                             2                                             140                                       7.0

3                                 20                                          2                                             3                                             120                                       6.0

4                                 5                                             0.5                                         4                                             100                                       5.0