Question

Potatoes cost Janice $1.10 per pound, and she has $5.00 that she could possibly spend on potatoes or other items. If she feels that the first pound of potatoes is worth $1.50, the second pound is worth $1.14, the third pound is worth $1.05, and all subsequent pounds are worth $0.30, how many pounds of potatoes will she purchase? What if she only had $2.00 to spend?

What is the marginal cost and the benefit cost? Also, what does it mean "if she feels that the first pound of potatoes...." so what is the actual cost of them, and how much is she getting them for?

Answer 1

The question specifies about the law o diminishing marginal utility this law states that the marginal utility from an object tends to decrease from each additional unit .this law explains that the consumer will purchase or consume the product till its benefit cost is greater than or equal to the cost of the product

• Janice may while having $5 would spend $3.3 on the potatoes since the benefit-cost cost to her is more than the actual cost of the potatoes and will stop at 3 pounds since the actual cost is greater than the benefit-cost of the potatoes after the said limit
• if she had only $2 she would purchase the potatoes for the whole amount that she has, since the benefit cost is greater than the actual cost the actual cost till the actual cost of $3.3

MARGINAL COST; it is the cost or attaining an additional unit of product in this case potatoes it is calculated by

$\Delta cost/\Delta number of units$

i.e, change in cost /change in number of units

BENEFIT-COST; it is the cost that the consumer is willing to sacrifice for a unit of product. This is not the actual cost o the product but is rather a cost that consumer is ready to pay

NOTE ;

1. The units (here pounds should not be divided again)
2. Law of diminishing marginal utility is the theory which gives these explanations
3. the consumer will stop at the point when the actual cost is greater than the benefit-cost
4. after every unit of product, the benefit-cost reduces

units purchased	actual cost	marginal benefit cost	total benefit cost
1	1.1	1.5	1.5
2	2.2	1.14	2.64
3	3.3	1.05	3.69
4	4.4	.30	3.99

THE POTENTIAL BUYER WILL STOP AT 3^rd UNIT BECAUSE IN THE FOURTH UNIT THE ACTUAL COST IS GREATER THAN BENEFIT COST.