Question

4) A college student, Susan, Often purchases candy bars or bags of potato chips between classes, she tries to limit her spending on snacks to $6 per week. A bag of chips costs $0.75 and a candy bar costs $0.50 from the vending machines on campus. She has been purchasing an average of 4 bags of chips and 6 candy bars each week. Susan is a careful maximizer of utility and she estimates that the Marginal utility of an additional candy bar during a week is 4. a) How much is she spending on snacks? How does this compare to her budget constraint? 3 onwip b) What is the marginal utility of an additional bag of chips during the week?

Answer 1

a)

Current consumption=Price of a bag of chips*Number of chip bags+Price of a candy bar*Number of candy bars

Current consumption=0.75*4+0.50*6=$6

Weekly consumption limit is $6. So, current consumption limit falls within the range given by budget constraint.

In this case, Current Consumption=Budget limit

b)

Marginal utility of additional candy bar, MUb=$4

Price of candy bar=Pb=$0.50

Price of a bag of chips=Pc=$0.75

Marginal utility of additional bag of chips, MUc=?

Utility maximization requires,

MUb/Pb=MUc/Pc

4/0.50=MUc/0.75

MUc=(4/0.50)*0.75 =6

Marginal utility of additional bag of chips=6