Paragraph i. The consumer side analogue to firm\'s goal of profit maximization i

Question

Paragraph i. The consumer side analogue to firm's goal of profit maximization is the goal of utility maximization subject to a budget constraint. Utility means satisfaction. So let's consider an individual who consumes only two goods: ale and bread. The quantity of ale is given in pints/week and the quantity of bread is given in loaves per week. Suppose the price of ale is $2/pint and the price of a loaf of bread is 50/load Let Income $8. The consumer's utility is given below. TUA TUg 90 A TUA MUA Qa TU MU 40 70 90 100 105 107 15 23 30 35 38 40.5 42 43 108 108.s

Explanation / Answer

a. Ans: 3 units of Ale and 4 units of Bread

Explanation:

Income = $8

Price of Ale = $2 and price of Bread = $ 0.50

MU of A / Price of A is equal to MU of B / Price of B when the consumer purchase 3 units of Ale and 4 units of Bread with his budget constraint.

(3 * $2 ) + (4 * $0.50 ) = $ 8

This is explained in the following table.

b .Ans : No , this bundle ( 3 units of Ale and 4 units of Bread ) does not violate '' bang for the buck " rule for maximization.

Explanation :

Bang for the buck rule means equalising marginal utility per dollar spent.

Quantity of A TU of A MU of A MU of A /Price of A Quantity of B TU of B MU of B MU of B /Price of B 0 0 0 0 0 0 0 0 1 40 40 20 1 15 15 30 2 70 30 15 2 23 8 16 3 90 20 10 3 30 7 14 4 100 10 5 4 35 5 10 5 105 5 2.5 5 38 3 6 6 107 2 1 6 40.5 2.5 5 7 108 1 0.5 7 42 1.5 3 8 108.5 0.5 0.25 8 43 1 2

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