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Unformatted text preview: 29-129UTILITY MAXIMIZATIONPurpose: To demonstrate the rule for utility maximization. To show the effects on consumerchoice of changes in prices and income.Computer files: utilmax198.xls.Instructions and questions:Sally Jones gets utility from consuming two goods, spaghetti and tacos. She receives afixed money income each week, and can buy spaghetti and tacos at fixed known prices. Theproblem she faces is to choosing the amounts of spaghetti and tacos that will maximize her utility.In other words, she has to solve the standard problem in the theory of consumer behavior.The utility maximizing amounts of the goods, the solution to Sally's problem, are those forwhich (i) she spends all of her income, and (ii) her marginal rate of substitution (MRS) ofspaghetti for tacos equals the ratio of the price of spaghetti to the price of tacos. Another way tosay this is that she should be on her budget constraint where an indifference curve is just tangentto the constraint.This problem set is the first of three on this subject. Here you are given Sally's preferencesas a set of indifference curves, and the income and prices she faces. The task is to find the utilitymaximizing amounts of the goods to consume. You accomplish this in Excel by using Goal Seekto find the amount of spaghetti that makes the differencebetween the MRS and price ratio equalto zero.In the problem set after this one you are asked to solve the same problem on theassumption utility is cardinally measurable. One way to state the utility maximizing rule in this...
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This note was uploaded on 04/03/2011 for the course ECO 2252 taught by Professor Edward during the Spring '08 term at Troy.
- Spring '08