E202Solutions3.2

# E202Solutions3.2 - maximizing her utility If so explain how you know If not how should she rearrange her spending Answer The information given

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3. Martha’s current marginal utility from consuming orange juice is 75 utils per ounce and her marginal utility from consuming coffee is 50 utils per ounce. If orange juice costs 25 cents per ounce and coffee costs 20 cents per ounce, is Martha maximizing her total utility from the two beverages? If so, explain how you know. If not, how should she rearrange her spending? Answer : 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. 5. Sue gets a total of 20 utils per week from her consumption of pizza and a total of 40 utils per week from her consumption of yogurt. The price of pizza is \$1 per slice, the price of yogurt is \$1 per cup, and she consumes 10 slices of pizza and 20 cups of yogurt each week. Is Sue
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Unformatted text preview: maximizing her utility? If so, explain how you know. If not, how should she rearrange her spending? Answer : The information given enables us to conclude that Sue’s average utility per dollar is the same for both pizza and yogurt. But this information does not enable us to say whether her current combination of the two goods is optimal. To do that, we must be able to compare their respective values of marginal utility per dollar. 7. For the demand curve shown, find the total amount of consumer surplus that results in the gasoline market if gasoline sells for \$2 per gallon. Find the total amount of consumer surplus if gasoline sells for \$3 per gallon and the change in consumer surplus. Answer : If gasoline sells for \$2 per gallon, consumer surplus is (1/2)(80,000 gal/yr)(\$8/gal)= \$320,000/yr. If gasoline sells for \$3 per gallon, consumer surplus is (1/2)(70,000 gal/yr)(\$7/gal)= \$245,000/yr. Consumer surplus has fallen by \$75,000/yr....
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## This note was uploaded on 02/20/2012 for the course ECON 202 taught by Professor Brightwell during the Spring '08 term at Texas A&M.

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