The table below shows the quantities of tofee bars and bags of cashews that a co

Question

The table below shows the quantities of tofee bars and bags of cashews that a cons could consume over a 1-weck period. Toffee (bars) Marginal Utility 10 Units Cashews (bags Total Marginal Utilit 12 10 Total Uility 2 3 4 12 18 23 29 34 3 27 27 27 0 37 0 27 TABLE 6-1 20) Refer to Table 6-1. If the prices of toffee bars and bags of cashews are both $1 and this consumer as $11 per week to spend on snacks, how many of each will he/she purchase? A) 4 toffee bars and 7 bags of cashews B) 6 toffee bars and 5 bags of cashews C) 5 toffee bars and 6 bags of cashews D) 5 toffee bars and 5 bags of cashews E) 3 toffee bars and 8 bags of cashews

Explanation / Answer

Option (C).

Budget constraint: $11 = $1 x T + $1 x C, or 11 = T + C [T: Toffee, C: Cashew]

Utility is maximized when MUT / PT = MUC / PC

Since PT = PC= $1, utility is maximized when MUT = MUC. Following bundles satisfy this condition:

(1T, 2C), (3T, 4C), (5T, 6C) ( (6T, 7C).

Only bundle (5T, 6C) satisfies budget constraint, because cost of this bundle = 5 x $1 + 6 x $1 = $(5 + 6) = $11. So, this is the optimal bundle.

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