The table below compares the marginal benefit Lucinda gets from Kewpie dolls and

Question

The table below compares the marginal benefit Lucinda gets from Kewpie dolls and Beanie Babies.

If Lucinda has only $18 to spend and the price of Kewpie dolls and the price of Beanie Babies are both $6, how many of each would Lucinda buy if she were rational?

a. 0 Kewpie dolls and 3 Beanie Babies

b. 2 Kewpie dolls and 1 Beanie Baby

c. 3 Kewpie dolls and 0 Beanie Babies

d. 1 Kewpie doll and 2 Beanie Babies

Lucinda's Kewpie Doll and Beanie Baby Marginal Benefit Kewpie Dolls Beanie Babies Kewpie Dolls Beanie Babies Marginal Benefit Marginal Benefit dollars $15.00 12.00 9.00 6.00 3.00 0.00 dollars $12.00 10.00 8.00 6.00 4.00 2.00 4 5 4 5

Explanation / Answer

Option (b).

Lucinda will buy that combination for which ratio of marginal utility (MU) (i.e. marginal benefit) to price is the same for each good.

That is, (MU of dolls / Price of dolls) = (MU of babies / Price of babies)

MU of dolls / 6 = MU of Babies / 6

Or,

MU of dolls = MU of babies

This condition is satisfied when:

(1) Number of dolls = 2 & number of Babies = 1 (MU of each = $12), and

(2) Number of dolls = 4 & number of Babies = 4 (MU of each = $6)

For option (1), total cost ($) = 2 x 6 + 1 x 6 = 12 + 6 = 18

For option (2), total cost ($) = 4 x 6 + 4 x 6 = 24 + 24 = 48, which is above the budget of $18.

So Lucinda will buy 2 Dolls & 1 Babies.

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