3. Optimal Consumption Decision in Utility Maximization
Model
1) Biwei’s marginal use value for chamomile tea consumption is
MU=-2Q+6, where Q is the box
quantity of chamomile tea consumed and takes only integer values.
Draw the marginal use value
curve and total use value curve for Q less than 5. If the price for
a box of chamomile tea is $4, how
many boxes will Biwei consume per week? If the price drops to $2,
how many boxes will Biwei
consume per week?
2) Suppose Biwei’s total use value is now given by TU = 8√Q, where
Q takes only integer values.
Draw the marginal use value curve and total use value curve for Q
less than 5. If the price for a
box of chamomile tea is $4, how many boxes will Biwei consume per
week? If the price drops to
$2, how many boxes will Biwei consume?
1)
The optimal consumption will be at,
P( additional unit cost)=MU( additional unit benefit)
Given p=4
So 4=6-2Q
Q=1,
Given price equal to 4 ,biwei consume 1 unit
P=2
So,2=6-2Q
Q=2
Given price Equal to 2, biwei consume 2 units.
2)TU=8√Q
MU=4/√Q
The optimal consumption will be at,
P( additional unit cost)=MU( additional unit benefit)
Given p=4
So 4=4√Q
Q=1,
Given price equal to 4 ,biwei consume 1 unit
P=2
So,2=4√Q
√Q=0.5
Q=0.25
Given price Equal to 2, biwei consume 0.25 units.
3. Optimal Consumption Decision in Utility Maximization Model 1) Biwei’s marginal use value for chamomile tea...
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