BUS 640 WK3assgmt Part 1

# BUS 640 WK3assgmt Part 1 - Week 3 Assignment Part 1...

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Week 3 Assignment Part 1 Jennifer Baxter BUS 640 Managerial Economics Professor Fanning June 20, 2011 Chapter 5: Applied Problem 1 Bridget has a limited income and consumes only wine and cheese; her current consumption choice is four bottles of wine and ten pounds of cheese. The price of wine is \$10 per bottle, and the price of cheese is \$4 per pound. The last bottle of wine added 50 units to Bridget’s utility, while the last pound of cheese added 40 units. a) Is Bridget making the utility-maximizing choice? Why or why not? According to Thomas and Maurice (2011), “to obtain maximum satisfaction from a limited money income, a consumer allocates money income so that the marginal utility per dollar spent on each good is the same for all commodities purchased, and all income is spent” (p. 180). Based on this information, Bridget is not making the utility-maximizing choice of spending a higher

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amount of her money income on wine as opposed to the lesser costing cheese. By re-allocating her spending, she can increase her utility while still spending within her budget. First, with Bridget’s consumption of wine and cheese only, she spends a total of: (4 bottles of wine * \$10/ea = \$40) + (10lbs of cheese * \$4/lb = \$40) = \$80 total income and total spending. Second, the price and marginal utility of wine is \$10 and 50 units; therefore, MUx/Px is 50/10 which =’s 5. Also, the price and marginal utility of cheese is \$4 and 40 units; therefore, MUy/Py is 40/4 which =’s 10. Since the marginal utility per dollar of cheese is greater than the marginal
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BUS 640 WK3assgmt Part 1 - Week 3 Assignment Part 1...

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