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utilmax198

# utilmax198 - 29 UTILITY MAXIMIZATION Purpose To demonstrate...

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29-1 29 UTILITY MAXIMIZATION Purpose: To demonstrate the rule for utility maximization. To show the effects on consumer choice 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 a fixed money income each week, and can buy spaghetti and tacos at fixed known prices. The problem 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 for which (i) she spends all of her income, and (ii) her marginal rate of substitution (MRS) of spaghetti for tacos equals the ratio of the price of spaghetti to the price of tacos. Another way to say this is that she should be on her budget constraint where an indifference curve is just tangent to the constraint. This problem set is the first of three on this subject. Here you are given Sally's preferences as a set of indifference curves, and the income and prices she faces. The task is to find the utility maximizing amounts of the goods to consume. You accomplish this in Excel by using Goal Seek to find the amount of spaghetti that makes the difference between the MRS and price ratio equal to zero.

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