2002 Microeconomics Question 3

Quantity Total utility Quantity Total utility 0 0 0 0 1 20 1 30 The table below shows total utility in utils that a utility-maximizing consumer receives from consuming two goods: apples and oranges. Apples Oranges Quantity Total utility Quantity Total utility 0 0 0 0 1 20 1 30 2 35 2 50 3 45 3 65 4 50 4 75 5 52 5 80

> Apples Total Oranges Total Quantity utility Quantity utility 0 0 0 0 1 20 1 30 2 35 2 50 3 45 3 65 4 50 4 75 5 52 5 80 Mu Mu Mu/$1 Mu/$2 > 30 15 > 20 20 15 15 > 20 10 > > 10 10 > 15 7.5 > 5 5 > 10 5 > 2 2 > 5 2.5 Assume that apples cost $1 each, oranges cost $2 each, and the consumer spends the entire income of $7 on apples and oranges. Using the concept of marginal utility per dollar spent, identify the combination of apples and oranges the consumer will purchase. Explain your reasoning.

> Apples Total Oranges Total Quantity utility Quantity utility 0 0 0 0 1 20 1 30 2 35 2 50 3 45 3 65 4 50 4 75 5 52 5 80 Mu Mu Mu/$1 Mu/$2 > 30 15 > 20 20 15 15 > 20 10 > > 10 10 > 15 7.5 > 5 5 > 10 5 > 2 2 > 5 2.5 Using the concept of marginal utility per dollar spent, identify the combination of apples and oranges the consumer will purchase. Explain your reasoning. The consumer will purchase 3 apples and 2 oranges because this is where the Mu/per dollar is equal and where the consumer maximizes satisfaction for a total utility of 95. (Maximum utility answer is not good enough.)

Finished The question continues if you want more!

> Apples Total Oranges Total Quantity utility Quantity utility 0 0 0 0 1 20 1 30 2 35 2 50 3 45 3 65 4 50 4 75 5 52 5 80 Mu Mu Mu/$1 Mu/$2 > 30 15 > 20 20 15 15 > 20 10 > > 10 10 > 15 7.5 > 5 5 > 10 5 > 2 2 > 5 2.5 With the prices of apples and oranges remaining constant (apples $1, oranges $2), assume that the consumer’s income increases to $12. Identify each of the following. 4 apples and 4 oranges because that is where Mu/per dollar is equal. The combination of apples and oranges the consumer will now purchase.

> Apples Total Oranges Total Quantity utility Quantity utility 0 0 0 0 1 20 1 30 2 35 2 50 3 45 3 65 4 50 4 75 5 52 5 80 Mu Mu Mu/$1 Mu/$2 > 30 15 > 20 20 15 15 > 20 10 > > 10 10 > 15 7.5 > 5 5 > 10 5 > 2 2 > 5 2.5 With the prices of apples and oranges remaining constant (apples $1, oranges $2), assume that the consumer’s income increases to $12. Identify each of the following. 4 apples and 4 oranges because that is where Mu/per dollar is equal. The total utility the consumer will receive from consuming the combination in (i) 50 + 75 = 125 utils

> Apples Total Oranges Total Quantity utility Quantity utility 0 0 0 0 1 20 1 30 2 35 2 50 3 45 3 65 4 50 4 75 5 52 5 80 Mu Mu Mu/$1 Mu/$4 > 30 7.5 > 20 20 15 15 > 20 5 > > 10 10 > 15 3.75 > 5 5 > 10 2.5 > 2 2 > 5 1.25 (c ) With income remaining at $12, assume the price of oranges increases to $4 each (apples remain at $1 each). Identify each of the following. The combination of apples and oranges the consumer will now purchase. 4 apples and 2 oranges

> Apples Total Oranges Total Quantity utility Quantity utility 0 0 0 0 1 20 1 30 2 35 2 50 3 45 3 65 4 50 4 75 5 52 5 80 Mu Mu Mu/$1 Mu/$4 > 30 7.5 > 20 20 15 15 > 20 5 > > 10 10 > 15 3.75 > 5 5 > 10 2.5 > 2 2 > 5 1.25 (c ) With income remaining at $12, assume the price of oranges increases to $4 each (apples remain at $1 each). Identify each of the following. 4 apples and 2 oranges The total utility the consumer will receive from consuming the combination in (i) 50 + 50 = 100 utils