Consumer Equilibrium Assignment
Part One:
Bill regularly buys lattes and reading magazines. He has budgeted a certain amount of his
income to these two goods and is spending that entire amount on the goods. Lattes cost $5.00 per cup and magazines are
$3.00 each. His marginal utility from
his last latte was 320 utils and his marginal utility from the last magazine he
read was 280 utils.
1. Is Bill
currently consuming in such a way as to maximizes his total utility given his
budget? Why or why not?
He is not maximizing his total utility given his budget
because lattes are rendering 64 utils per dollar while magazines are rendering
93 utils per dollar, and since they aren’t equal, he is not maximizing his
total utility.
2. If Bill
is not in a position of consumer equilibrium, how should he change his
consumption of lattes and magazines to bring about equilibrium? Explain using the concept of marginal utility
per dollar spent.
Bill should decrease his consumption of magazines as to
decrease marginal utility and increase his consumption in lattes. With
magazines decreasing and lattes increasing, consumer equilibrium can be found,
ensuring (PL/PM) =(MUl/Mum)
3. Suppose
Bill’s budget for lattes and magazines increases. How will this impact his consumption of
lattes and magazines?
The consumption of both goods will increase because his
purchasing capability will increase. More income or budget increases purchasing
ability.
4. Suppose
Bill is in a state of consumer equilibrium and the price of lattes
increases. How should he change his
consumption?
Less lattes will have to be consumed to maintain a state of
consumer equilibrium.
Part Two:
Emma’s weekly allowance is $16. She spends all of that money on a combination
of Fruit Smoothies and Gum. Complete the
chart below and answer the questions that follow.
Fruit
Smoothies: Price = $4 Packs of Gum: Price = $2
Unit TU MU MU/$ TU MU MU/$
0 0 0
1 100 60
2 160 116
3 208 156
4 244 192
5 264 208
6 276 218
1. Jill’s
utility maximizing combination of Fruit Smoothies and Gum is ______________
smoothies and ____________ packs of gum.
2. Her total
utility from this combination would be ___________ utils.
3. List the
order in which Jill will consume her combination of Fruit Smoothies and packs
of Gum.
Ex: Smoothie, Gum,
Smoothie, Smoothie (continue until she has exhausted her budget).
ScholarMatic: Explanation & Answer
Your ready answer from a verified tutor is just a click away for as little as $14.99
Click Order Now to get 100% Original Answer Customized to your instructions!
