sol_even_5.ppt

# sol_even_5.ppt - Chapter 5 Demand: The Benefit Side of the...

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Chapter 5 Demand: The Benefit Side of the Market Questions 2, 4, 6, 8, 10

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Chapter 5 Problem 2: 2)  You are having lunch at an all-you-can-eat buffet.  If you are rational, what  should be your marginal utility from the last morsel of food you swallow? What does “rational person” means? From chapter 1, we know that “rational person” means that a person with a well-defined goal who tries to fulfill the goals as best he can (producing the best outcome). Rational decision makers make their decisions/choices that maximizes their total benefit. (maximizes their total satisfaction s) Therefore, we can always predict people’s behavior as the consequences of choices that maximize total utility st. constraints. Thus, Marginal benefit = Marginal utility
Refer to the Question, Marginal Utility:  the additional utility (satisfaction) gained from  consuming an additional unit of good.    So, what is the marginal benefit (marginal utility) for this person to  have an additional morsel of food in the buffet? In the all-you-can-eat buffet, the marginal cost of an  additional  morsel of food  is Zero (free). Therefore, a rational person will continue to eat until the marginal  benefit (marginal utility) of the last morsel falls to  Zero

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Chapter 5 Problem 4: 1) Toby’s current marginal utility from consuming peanuts is 100utils  per ounce and his marginal utility from consuming cashews is  200utils per ounce.  If peanuts cost 10 cents per ounce and  cashews cost 25 cents per ounce, is Toby maximizing his total  utility from the kinds of nuts?  If so, explain how you know.  If not,  how should he rearrange his spending?
Rational Spending Rule:   Spending should be allocated across goods so that the  marginal  utility per dollar (the ratio)  is same for each good   MU  X /P X  = MU Y /P Y If Rational Spending Rule is not satisfied, we can always reallocated  the goods:  MU  / P   MU  / P Spending a dollar more on good X, the MU per dollar from consuming X falls Spending a dollar less on good Y, the MU per dollar from consuming Y rises

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Refer to the Question: Check the marginal utility per dollar spent on the two goods. The MU per dollar from consuming peanuts is: 100utils per ounce/\$0.10 per ounce = 1000utils per dollar from his last dollar spent on peanuts The MU per dollar from consuming cashews is: 200utils per ounce/\$0.25 per ounce =   800utils per dollar from his last dollar spent on cashews
Is the Rational Spending Rule satisfied?

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## This note was uploaded on 09/06/2010 for the course FBE ECON1001 taught by Professor Dr.demurger during the Fall '08 term at HKU.

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sol_even_5.ppt - Chapter 5 Demand: The Benefit Side of the...

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