Assume that the following tables are Mrs. Rational’s utility schedule: Complete
ID: 1107565 • Letter: A
Question
Assume that the following tables are Mrs. Rational’s utility schedule: Complete the table and answer the questions below (type the answers in the space and make sure you identify the sub head of what you are calculating).
Note: Only question 1 is based on the table. Questions 2 and 3 are conceptual.
Clothing ($10 per unit)
Units
TU
-----?
------?
1
10,000
2
15,000
3
18,500
4
20,500
5
21,500
6
22,000
7
22,300
Food ($1.00 per unit)
Unit
TU
------?
-----?
1
10,000
2
18,000
3
23,000
4
25,000
5
25,800
6
26,200
7
26,450
8
26,650
9
26,800
10
26,900
11
26,975
12
27,025
Concert ($5.00 per unit)
Unit
TU
-----?
-----?
1
1,200
2
2,200
3
2,700
4
3,100
5
3,300
With a budget of $75.00
1. How many units of Clothing, Food, and Concert will Mrs. Rational buy to maximize her utility?
2. What does the equilibrium; Mu pickles/Price pickle = Mu ice-cream/ Price ice-cream mean. Explain in your own words.
3. Suppose the price of pickle increase as described in question 2 above:
a. What will happen to the equilibrium?
b. What kind of adjustment would you make in your purchase? Please explain clearly.
Units
TU
-----?
------?
1
10,000
2
15,000
3
18,500
4
20,500
5
21,500
6
22,000
7
22,300
Explanation / Answer
1. How many units of Clothing, Food, and Concert will Mrs. Rational buy to maximize her utility?
This can be found by using the rule which argues that MU/P should be same and the resultant income is inexhaustible.Computation predicts that the utility maximizing bundle is 5 units of Clothing, 10 units of Food, and 3 units Concert
5 x 10 + 10 x 1 + 3 x 5 = $75
2. What does the equilibrium; Mu pickles/Price pickle = Mu ice-cream/ Price ice-creammean. Explain in your own words.
This describes that additional utility received from spending one more dollar on the two goods should be same for equilbrium to achieve otherwise we have more utility from one good in terms of MU/P and so this will continue till its marginal utility per dollar is same as that of the other
3. Suppose the price of pickle increase as described in question 2 above:
a. What will happen to the equilibrium?
The equilibrium will have a higher MU/P for other goods and a lower value for pickle. This would imply that MU/P for other goods is more utility generating and so individual will consume more of the other two goods.
b. What kind of adjustment would you make in your purchase? Please explain clearly.
We buy other goods more and buy less of this good because its per dollar marginal utility has fallen.
Units TU MU MU/P Unit TU MU MU/P Unit TU MU MU/P 1 10,000 10,000 1000 1 10,000 10,000 10000 1 1,200 1,200 240 2 15,000 5,000 500 2 18,000 8,000 8000 2 2,200 1,000 200 3 18,500 3,500 350 3 23,000 5,000 5000 3 2,700 500 100 4 20,500 2,000 200 4 25,000 2,000 2000 4 3,100 400 80 5 21,500 1,000 100 5 25,800 800 800 5 3,300 200 40 6 22,000 500 50 6 26,200 400 400 7 22,300 300 30 7 26,450 250 250 8 26,650 200 200 9 26,800 150 150 10 26,900 100 100 11 26,975 75 75 12 27,025 50 50Related Questions
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