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HW7_Answerkey - HW 7 Answer Key 1 Mary consumes pizza pies...

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HW 7 – Answer Key 1) Mary consumes pizza pies and hamburgers. The price of a pizza pie is 4 dollars and the price of a hamburger is 2 dollars and she has a weekly allowance of 20 dollars. Consider the following two tables, where the total utility that Mary receives from the consumption of pizza pies and hamburgers is represented. Which of the following is Mary’s optimal consumption bundle for a week? Quantity Total Utility 5 25 4 23 3 20 2 16 1 10 0 0 Pizza Pies Quantity Total Utility 10 36.5 9 36.5 8 36 7 35 6 33 5 30 4 26 3 21 2 15 1 8 0 0 Hamburgers a)3 Pizza Pies and 5 Hamburgers b) 0 Pizza Pies and 8 Hamburgers c) 2 Pizza Pies and 6 Hamburgers d) 5 Pizza Pies and 7 Hamburgers Answer: For utility maximization to happen we need to have: i) all the income being spent; ii) an equality between the marginal utility per dollar of pizza and hamburgers. In the following table we have the consumption combinations that spend the entire income. I compute the marginal utility and the marginal utility per dollar.
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Quantity Total Utility Mg Utility MgU/P Quantity Total Utility Mg Utility MgU/P 10 36.5 0 0 0 0 0 0 9 36.5 0.5 0.25 8 36 1 0.5 1 10 10 2.5 7 35 2 1 6 33 3 1.5 2 16 6 1.5 5 30 4 2 4 26 5 2.5 3 20 4 1 3 21 6 3 2 15 7 3.5 4 23 3 0.75 1 8 8 4 0 0 5 25 2 Hamburgers Pizza Pies Therefore, answer c) is the correct one.
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