Question

Given a budget of $15,

	Price of ice cream cones =		$            3.00			Price of candy =	$            2.00				New price of candy =	$    1.50
	Quantity of Ice Cream Cones	Total Utility	Marginal Utility	Marginal Utility per Dollar		Quantity of Candy	Total Utility	Marginal Utility	Marginal Utility per Dollar		Marginal Utility per Dollar
	1	25				1	20
	2	45				2	38
	3	60				3	48
	4	69				4	55

• Determine the number of ice cream cones and candies purchased using the attached spreadsheet. Assume ice cream cones are $3 and candies are $2.  
• Determine the number of ice cream cones and candies purchased using the attached spreadsheet if ice cream cones if the price of candies decreases to $1.5.
• Using the information you have so far, develop a demand curve of candy.
• Explain the rule for maximizing total utility.

Answer 1

1) Marginal Utility is the change in total utility when an additional unit of commodity is consumed.

MU per dollar = MU / Price of good

Optimum condition is where MUx/Px = MUy/Py

MUMU per dollar MU/3 Qty of CandyTUMUMU per dollar MU/2 Qty of Ice cream conesTU 25 45 1 20 38 4810 2 20 6.67 2 18 15 4 69 4 3.5

and Px.Qx + Py.Qy = Income

3Q_cone + 2Q_candy = 15

MU per dollar of ice cream cones = MU per dollar of candy = 5 at 3 units of cones and 3 units of candy.

So, Number of ice cream cones purchased = 3

No. of candies purchased = 3

2) New budget constraint; 2Q_cone + 1.5Q_candy = 15

Now, No of ice cream cones purchased = 3

MU MU per dollar MU/1.5 Qty of Ice cream cones TU 25 45 MU MU per dollar MU/3 Qty of Candy TU 20 38 1 18 12 6.67 4.67 20 6.67 15 10 4 69

No. of candies purchased = 4

Total cost of consuming this bundle = 3 x 3 + 1.5 x 4 = 9 + 6 = $ 15 = Budget of consumer

3) When price of candy is 2 then quantity purchased is 3 units.

When price is 1.5 then quantity purchased is 4 units.

Price of candy 1.5 Demand curve 0 4 Quantity of candy

Total utility is maximized when marginal utility is zero which means further increase in consumption does not increase total utility.