Principles of Microeconomics + DiscoverEcon code card

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Answers to Problems 1. Because willingness to pay for food quality is likely to be an increasing function of income, we expect patrons of the gourmet restaurant to have higher incomes, on average, than the patron of the diner. And since willingness to pay for service is also likely to be an increasing function of income, we expect higher service quality in the gourmet restaurant. Since diners tend to leave tips of about 15 percent of the prices of their meals, gourmet restaurant patrons do, in fact, pay for, and receive, higher service quality. 2. Since the marginal cost of an additional morsel of food is zero, a rational person will continue eating until the marginal benefit of the last morsel (its marginal utility) falls to zero. 3. Martha is currently receiving (75 utils/ounce)/($0.25/ounce) = 300 utils per dollar from her last dollar spent on orange juice, but only (50 utils/ounce)/($0.20 /ounce) = 250 utils per dollar from her last dollar spent on coffee. Since the two are not equal, she is not maximizing her utility. She should spend more on orange juice and less on coffee. [as she consumes more orange juice, the MU per $ for orange juice will fall; and as she spends less on coffee, the MU per $ for coffee will increase. Utility is maximized when these two values are equal.]
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