Micro Written Assignment Answers

MICRO WRITTEN ASSIGNMENT ANSWERS

Spring 2015

The answers to the Homework Assignments are in RED. I believe these answers will help you study for the exam. If you have questions after going over the answers, please email me in ANGEL.

Assignment # 6

Chapter 6

• Page 165, #8. Consider the table below, which lists James’s marginal utility schedule for steak and hamburger meals. Given a budget of $45, how many steak and hamburger meals will James buy per month to maximize his total utility? What is the total utility realized? Show how you got your answers.

Steak
meals
per
month / Marginal
utility of
steak
meals / Price
per
steak
meal / Hamburger
meals
per
month / Marginal
utility of
hamburger
meals / Price
per
hamburger
meal
1 / 20 / $10 / 1 / 15 / $5
2 / 15 / $10 / 2 / 8 / $5
3 / 12 / $10 / 3 / 6 / $5
4 / 10 / $10 / 4 / 4 / $5
5 / 8 / $10 / 5 / 2 / $5

Duplicate (draw) the table on your paper and answer the questions. The concept of utility and utils that is talked about in this chapter may seem silly to you, but it really does help us understand how we think and make choices depending on the circumstances.

Consumer equilibrium is reached where the marginal utilities per dollar of both steak and hamburger meals are equal. This occurs at 3 meals of each per month. Total utility realized will be 76 utils (20 + 15 + 12 for steak meals and 15 + 8 + 6 for hamburger meals). To arrive at this answer requires calculating the MU/$1 for steak and hamburger meals by dividing column 2 by column 3 and column 5 by column 6, respectively. The total utility for each meal is the sum of the marginal utilities for each meal consumed to the number where the MU/$1 (1.2) of both meals are equal at 3 meals of each choice. Try any other combination of steaks and hamburgers with a budget of $45 and you will find that it will total less than 76 utils. Computed from the following table:

Number
of
Steak
Meals / MU
of
Steak
Meals / Price
Per
Steak
Meal / MU/P
(calculates marginal utility per dollar spent) / Order
Of
Choice / Number
Of
Hambur
Meals / MU
of
Hambur
Meals / Price
Per
Hambur
Meal / MU/P
(calculates marginal utility per dollar spent) / Order
Of
Choice
1 / 20 / $10 / 2.0 / Choice #2 / 1 / 15 / $5 / 3.0 / Choice #1
2 / 15 / $10 / 1.5 / Choice #4 / 2 / 8 / $5 / 1.6 / Choice #3
3 / 12 / $10 / 1.2 / Choice #5 or6 / 3 / 6 / $5 / 1.2 / Choice #5 or6
4 / 10 / $10 / 1.0 / 4 / 4 / $5 / 0.8
5 / 8 / $10 / 0.8 / 5 / 2 / $5 / 0.4

Following the above table:

The first choice would be a hamburger (15 utils)

The second choice would be a steak (20 utils)

The third choice would be a hamburger (8 utils)

The forth choice would be a steak (15 utils)

The fifth and sixth choice is a tossup and would be a steak ( 12 utils) and hamburger (6 utils)

So three of each would be chosen in the above order (total of 76 utils).

Again, you may think this is a silly way to look at it, but this is the way our brain sub-consciously

calculates value. If the price of one of these items changes, our brain would re-calculate.

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