3. Finding the optimal combination of two goods Kenji enjoys consuming both soda

Question

3. Finding the optimal combination of two goods Kenji enjoys consuming both soda and coffee. Each can of soda costs Ps $1, and each cup of coffee costs Pc -$2. Suppose that Kenji buys 75 cans of soda and 50 ups of coffee per month. The following graphs show his marginal utility curves for soda and coffee. At his aurrent consumption level, Kenji's marginal utility from consuming the last can of soda he bought is MUs 12 utils per can, and his marginal utility from consuming the last cup of coffee he bought is MUc 12 utils per cup. 24 24 20 20 S 10 16 12 12 . 0 25 075 100 12 100 SODA (Cans) 026 50 76 100 126 100 COFFEE (Cups)

Explanation / Answer

(1) No, he could buy more coffee and less soda, not spend any more money, and be better-off.

Utility is maximized when (MUs / Ps) = (MUc / Pc)

When MUs = MUc = 12,

MUs / Ps = 12/1 = 12

MUc / Pc = 12/2 = 6

Since (MUs / Ps) > (MUc / Pc), utility is not maximized, which will be maximized by buying more coffee & less soda.

(2) There is equilibrium only when (MUs/Ps) = (MUc/Pc)

(3) To maximized utility, Kenji will purchasse 125 cans of soda and 100 cups of coffee.

SODA COFFEE Combination Cans MUs MUs/Ps Cups MUc MUc/Pc Equilibrium? A 100 8 8 100 8 4 NO B 75 12 12 50 12 6 NO C 125 4 4 100 8 4 YES D 25 20 20 25 14 7 NO

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.