Question

D) From class lecture and Sapling Leaming Homework: Suppose that Sam allocates his income between milk and cereal. Milk costs $2.50 per gallon and cereal costs $5.00 per box. Sam has $50 per week to spend on these two goods. The following table shows Sam's preference for consumption bundles, as well as how Sam's marginal utility (MU) for milk and cereal, respectively, varies as consumption varies. Given the information provided here, how should Sam allocate his income between milk and cereal? Milk Cereal MU Milk MU Cereal 20 Sam should purchase the following, as this is his optimal consumption bundle: (Show your work) 135 * * 60 13 45 15 IN 16 10 Illustrate the budget constraint for Sam given the price of milk, cereal, and the optimum consumption bundle: E) Explain the difference between the total utility and marginal utility from consuming a good or service like Pizza. F) Using rational theory explain how rational individuals optimize their decision making? And, why sometimes rational individuals make irrational economic decisions?

Answer 1

Solution: @ Giren milk cost = 88.50 pergallon Cereal cost = $5.00 pegbox sam Spend = $50 per week calcolation: Consumption is optimal when (mum 1pm) = (muc (pc) (m: milk, C: Cereals am mum pim mum Ipm ac mue pe muelpc 20 3 2.5 1.2 2.5 1.6 I 135 s 27 b 16 5 25 b ma bort o o b og I w e- b 10 2.5 3.2 h À 9.5 3.6

b 4 2 ma bo 2.5 15 2.5 16 2.5 5.2 5 G4 7 45 5 9 8 30 56 9 12 5 24 o h 8 5 16 2.5 0 10 T. Budget line =50=2.5m +50 20=m+2c coniding by 2.5) optimal bundles are: milk =18, cereal =10 milk = 14, Cereal = 9 milk=4, cereal=8 Since for all there Bundles (mum (pm) = (muc (pc) T out of these, milky & cereal = 8, Total cost = 4(2.5)+865) = tot 40 (50 (Budget)

· optimal bundle ! Milk = 4, cereal =8 Budget line (AG) is of follows: when c=o, n=20 (ventical intercept) when m=0 , C=2012 =10 ( Horizontal intercept) (cts, mix =4) optimal bundle is at point X 20 A m* loc O