Question
Can you please review the following document to ensure I'm on the correct path the concepts? Rony is choosing between two snacks, chips and sour
Can you please review the following document to ensure I'm on the correct path the concepts?
- Rony is choosing between two snacks, chips and sour gums, and her marginal utility from each is as shown below.
Units of Chips | MUc | Units of Sour Gums | MUs |
1 | 10 | 1 | 8 |
2 | 8 | 2 | 7 |
3 | 6 | 3 | 6 |
4 | 4 | 4 | 5 |
5 | 3 | 5 | 4 |
6 | 2 | 6 | 3 |
a. If Rony's income is $9 and the price of chips and sour gums are $2 and $1 respectively, what quantities of each will Rony purchase to maximize utility?(4 marks,show all your work)
Marginal Utility per $ spent:
Chips = MUc / Pc = 10 / 2 = 5
Sour Gums = MUs / Ps = 8 / 1 = 8
Units of chips = Income / Pc = $9 / $2 = 4.50 units
Units of sour gums = Income / Ps = $9 / $1 = 9 units
To maximize utility, Rony will purchase 4 units of chips and 9 units of sour gums.
b. What total utility will Rony realize?(1 mark)
Total Utility = Sum of the Marginal Utilities of the purchased quantities of both snacks
Utility of Chips = 10 + 8 + 6 + 4 = 28
Utility of Sour Gums= 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 + 0 = 36
Total Utility = 64
c. Assume that other things remain unchanged, the price of chips falls to $1. What quantities of chips and sour gums will she now purchase?(2 marks)
Unit of Chips = Income / Pc = $9 / $1 = 9 units
Units of Sour Gums = Income / Ps = $9 / $1 = 9 units
Rony will purchase 9 units of both chips and sour gums.
d. When the price of chips is $1, what is Rony's total utility?(1 mark)
Utility of Chips = 10 + 8 + 6 + 4 + 3 + 2 + 1 + 0 + 0 = 34
Utility of Sour Gums = 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 + 0 = 36
Total Utility = 70
e. Using the two prices and quantities for chips, draw a demand curve for chips for Rony.(2 marks)
Price | Quantity Demanded |
$2 | 9 |
$1 | 4 |
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