Question

IGH A Number ofice IB Total Utility Mangal Ver C D Marginal Marginal Utility Utility from last per price M E Number of cams of Coca Cola Total Utility from Coca Cola Utility per price Marginal Utility per price MU. Coca Cola P PUS1.00 P P2.00 - PL P-5200 0 0 - - 140 2702 3 903 4 106 5 114 16 118 0 0 140 70 90 4 105 111 6 113 Assume that the price of Piz is $2 per slice and the price of cans of Cola is $1 per can. 1) Complete columns (A thru H) of the table above. (8 points) 2) What are all of the possible combinations of pizza and Cola available if your budget constraint is $8.00? (4 points) 3) If your budget constraint remains at $8, what is the utility maximizing combination of Pizza and Cola? (4 points) 4) Assume the Price of cans of cola increases to $2.00 per can and the budget remains $8.00. Complete column (I) in the table above and determine the utility maximizing combination of Pizza and Cola? (4 points)

Answer 1

Formula to be used: TU = MUN - MU(n-1) The complete table is below: TU MU MU/P N of coca cola TU MU MU/P of $1 MU/P of $2 N of ice cream 0 O 20 70 15 70 30 20 40 30 20 15 30 20 15 10 16 106 114 118 105 111 113 6 2 2 Budget constraint: 2P + 1C = 8 Possible combinations: (0,8) (1,6) (2,4) (3,2) (4,0) Utility is maximized at the point MU/P of both the goods is equal Out of the combinations listed in subpart (2), the optimal combination would be: (2,4) At this combination, MU/P of both goods is equal at 15 Thus, 2 pizza and 4 coca cola would be consumed New Budget constraint: 2P + 2C = 8 Possible combinations: (0,4) (1,3) (2,2) (3,1) (4,0) Utility is maximized at the point MU/P of both the goods is equal Out of the combinations listed above, the optimal combination would be: (2,2) At this combination, MU/P of both goods is equal at 15 Thus, 2 pizza and 2 coca cola would be consumed