Question

this is a microeconomics question

Question 9: What two conditions are met when a consumer in maximizing utility? Question 10: Sally consumes only two goods, shoes and "everything else”. For five different shopping trips (each with different prices), the prices and Sally's marginal utilities are shown below. Shoes Everything Else MU Prices ($) MU Prices ($) Trip 1 125 250 50 100 Trip 2 100 200 50 100 Trip 3 75 150 50 100 Trip 4 50 100 50 100 Trip 5 25 50 50 100 a) Is sally maximizing her total utility on each shopping trip? Explain why or why not? b) Using what you have learned in this chapter about marginal utility, explain how the number of shoes consumed is changing as their price changes. c) Can you detect the shape of Sally's demand curve for shoes from the data shown in the table?

Answer 1

Answer 9:

Two conditions that are to be met when consumer maximizes his utility are:

i) He must be purchasing the bundle that lies on the BUDGET LINE so as to make sure that he spends all his income on the goods and there is no way to further increase the expenditure on any of the goods.

ii) He must be buying that quantity of goods at which the marginal utility derived from the last unit equals the willingness to pay the price for the good.

Answer 10:

a) No, Sally does not seem to maximise her utility as she is paying the price which is double the marginal utility she is deriving from either of the good.

b) As we can observe from the table , the price of shoes are decreasing in proportion to the marginal utility derived from the shoes. We know by the application of diminishing marginal utility that when we tend to increase the number of trips or when we buy more shoes, the marginal utility falls. But in this case the proportion of marginal utility to the price we are paying for it is constant i.e. (1/2) and hence there will not occur any changes in number of shoes consumed when there price changes. Therefore they won't buy any as Price> MU.

c)No there will be no demand as a rational consumer will never demand when the price he has to pay is double the MU he mayvderuve from the product.