Below is Connie consumer’s utility from consuming Starbucks Coffee and Cheryl’s
ID: 1192459 • Letter: B
Question
Below is Connie consumer’s utility from consuming Starbucks Coffee and Cheryl’s cookies. Answer the following questions:
1. Complete the table.
2. Conclude whether or not Connie follows the law of diminishing marginal utility.
3.Find the bundle of coffee and cookies that maximize Connie’s utility given:
a. Her income is $20
b. Price of a cup of coffee is $4
c. Price of a cookie is $2
4. What is her Total Utility from this combination of goods?
5. Suppose that the price of coffee now falls to $3. Fill out the table below and find the bundle of coffee and cookies that maximize Connie’s utility given:
a. Her income is $20
b. Price of a coffee is now $3
c. Price of a cookie is still $2
6. What has happened to Connie’s total utility because of the decrease in the price of coffee?
7. Draw Connie’s demand for coffee in the space below:
Cookies Coffee Q TU MU MU/P Q TU MU MU/P 1 40 1 100 2 70 2 160 3 95 3 200 4 115 4 230 5 133 5 250 6 150 6 265 7 165 7 275 8 175 8 280 9 183 9 284 10 190 10 287Explanation / Answer
Price of Coffee = $4 per cup
Price of Cookie = $2 per peice
Income = $20
Q1. Following is the complete table -
Table 1
Cookies
Coffee
Q
TU
MU
(MUn = TUn – TUn-1)
MU/P
Q
TU
MU
(MUn = TUn – TUn-1)
MU/P
1
40
1
100
2
70
70 – 40 = 30
30/2 = 15
2
160
160 – 100 = 60
60/4 =15
3
95
95 – 70 = 25
25/2 = 12.5
3
200
200 – 160 = 40
40/4 = 10
4
115
115 – 95 = 20
20/2 = 10
4
230
230 – 200 = 30
30/4 = 7.5
5
133
133 – 115 = 18
18/2 = 9
5
250
250 – 230 = 20
20/4 = 5
6
150
150 – 133 = 17
17/2 = 8.5
6
265
265 – 250 = 15
15/4=3.75
7
165
165 – 150 = 15
15/2 = 7.5
7
275
275 – 265 = 10
10/4 = 2.5
8
175
175 – 165 = 10
10/2 = 5
8
280
280 – 275 = 5
5/4 = 1.25
9
183
183 – 175 = 8
8/2 = 4
9
284
284 – 280 = 4
4/4 = 1
10
190
190 – 183 = 7
7/2 = 3.5
10
287
287 – 284 = 3
¾ = 0.75
Q2. If we follow the consumption pattern of Connie with respect to both Cookies and Coffee as depicted in Table 1, we can see that as Connie is increasing her consumption of both Cookies and Coffee, marginal utility she is getting from consumption of each successive unit of both goods is decreasing.
This decrease in marginal utility with increase in consumption implies operation of law of diminishing returns.
Hence, Connie follows the law of diminishing marginal utility.
Q3. A consumer maximizes his utility in case of consumption of two commodities when following conditions fulfill -
1. The ratio of marginal utility to price is same in case of both goods.
2. Marginal utility fall as consumption increases.
table 1 shows that ratio of marginal utility to price (MU/P) of both goods is same in two instances -
1. When Connie consumes 3 cups of coffee and 4 pieces of cookies. MU/P is 10 for both goods at these consumption levels.
2. When Connie consumes 4 cups of coffee and 7 pieces of Cookies. MU/P is 7.5 for both goods at these consumption levels.
Moreover, marginal utility is falling in both cases as Connie increases her consumption after these bundles.
However, Connie has budget of $20.
Calculate Total cost of Ist bundle -
This bundle contains 3 cups of coffee and 4 pieces of cookies.
Total cost = (3*$4) + (4*$2) = $12 + $8 = $20
Calculate Total cost of IInd bundle -
This bundle contains 4 cups of coffee and 7 pieces of cookies.
Total cost = (4*$4) + (7*$2) = $16 + $14 = $30
This bundle is out of budget for Connie.
Hence, Connie is maximizing her utility when she consumes a bundle containing 3 cups of coffee and 4 cookies because in this case not only ratio of marginal utility to price (MU/P) of both goods is same but also this bundle is with in her budget.
Q4. Her utility maximizing bundle is as follows -
3 cups of coffee and 4 pieces of cookies
Total utility of 3 cups of coffee = 200
Total utility of 4 pieces of cookies = 115
Total utility of this bundle = Total utility of 3 cups of coffee + Total utility of 4 pieces of cookies
= 200 + 115
= 315
Connie's total utility from this utility maximizing combination of goods is 315.
Cookies
Coffee
Q
TU
MU
(MUn = TUn – TUn-1)
MU/P
Q
TU
MU
(MUn = TUn – TUn-1)
MU/P
1
40
1
100
2
70
70 – 40 = 30
30/2 = 15
2
160
160 – 100 = 60
60/4 =15
3
95
95 – 70 = 25
25/2 = 12.5
3
200
200 – 160 = 40
40/4 = 10
4
115
115 – 95 = 20
20/2 = 10
4
230
230 – 200 = 30
30/4 = 7.5
5
133
133 – 115 = 18
18/2 = 9
5
250
250 – 230 = 20
20/4 = 5
6
150
150 – 133 = 17
17/2 = 8.5
6
265
265 – 250 = 15
15/4=3.75
7
165
165 – 150 = 15
15/2 = 7.5
7
275
275 – 265 = 10
10/4 = 2.5
8
175
175 – 165 = 10
10/2 = 5
8
280
280 – 275 = 5
5/4 = 1.25
9
183
183 – 175 = 8
8/2 = 4
9
284
284 – 280 = 4
4/4 = 1
10
190
190 – 183 = 7
7/2 = 3.5
10
287
287 – 284 = 3
¾ = 0.75
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