Utility Maximization

Problem Set

Use the table below to answer questions 1-2. Use the graphs below to answer questions 5-6.
Utility
Units 0 1 2 3 4 5 6 7
Total Utility 0 20 35 45 50 50 45 35

1. The marginal utility for the fifth unit is:

a. 15.
b. 10.
c. 5.
d. 0.
e. 50.

2. The law of diminishing marginal utility is first observed at

the unit.
a. second
b. third
c. fifth 5. For months now, Agnes has had $20 per month to spend
d. sixth on tea and scones. The price of each cup of tea and each
e. first scone is $1. Which chart(s) in the figure show(s) what will
happen to her budget line if her income increases to $25?
3. Which of the following statements is true? a. Chart A
a. If total utility is at a maximum, then marginal utility is rising. b. Chart B
b. If total utility is at a maximum, then marginal utility is at its c. Chart C
average value. d. Chart D
c. If total utility is at a maximum, then marginal utility is at a e. Chart A and C
maximum.
d. If total utility is at a maximum, then marginal utility is zero. 6. For months now, Agnes has had $20 per month to spend
e. If total utility is at a maximum, the next unit of on tea and scones. The price of each cup of tea and each
consumption will cause marginal utility to equal zero. scone has been $1. Which chart(s) in the figure
show(s) what will happen to her budget line if the price of
Use the table below to answer question 4. a cup of tea falls to $0.50?
a. Chart A
Utility from Oranges and Starfruit b. Chart B
Pounds of Total Utility Pounds of Total Utility c. Chart C
Oranges from Oranges Starfruit from Starfruit d. Chart D
0 0 0 0 e. Chart B and D.
1 24 1 70
2 44 2 130 7. Chuck spends all his income on two goods: tacos and
3 60 3 180 milkshakes. His income is $100, the price of tacos is $10,
4 72 4 220 and the price of milkshakes is $2. Put tacos on the
5 80 5 250 horizontal axis and milkshakes on the vertical axis.
6 84 6 270 The opportunity cost of one taco equals units of
7 84 7 280 milkshakes.
a. 2
4. Oranges costs $2 per pound and starfruit cost $5 b. 10
per pound. The table shows Ned's total utility from c. 5
eating various amounts of oranges and starfruits. How d. 1/5
many pounds of oranges and starfruit should Ned eat, e. 4
if Ned has $26?
a. 0 pound of oranges, 5 pounds of starfruit, $1 left over 8. Jane spends all her income on Goods X and Y and is
b. 8 pounds of oranges and 2 pounds of starfruit purchasing the optimal consumption bundle. If the
c. 3 pounds of oranges and 4 pounds of starfruit MUX/MUY = 3 and the price of X is equal to $12, then the
d. 4 pounds of oranges and 5 pounds of starfruit price of Y is equal to:
e. 3 pounds of oranges and 3 pounds of starfruit a. $36.
b. $4.
c. $12.
d. $3.
e. $6
9. Jessica spends all her income on two goods, A and B. Use the table below to answer question 12.
The price of A is $5, and the price of B is $7. At the
current consumption bundle, the marginal utility of A is Utility from Burgers and Milkshakes
10, and the marginal utility of B is 21. To maximize utility QSHAKES MUSHAKES QBURGERS MUBURGERS
given her income, Jessica should: 0 0
a. increase her consumption of B and decrease her 36 45
consumption of A. 1 1
b. increase her consumption of A and decrease her 32 40
consumption of B.
2 2
c. continue to consume the current bundle.
d. consume equal amounts of A and B. 28 35
e. decrease her consumption of A and decrease her 3 3
consumption of B. 24 30
4 4
10. John Smedley, a careful maximizer of utility, consumes only 20 25
two goods, peanut butter and broccoli. He had just achieved 5 5
the utility-maximizing solution in his consumption of the two 16 20
goods when the price of broccoli rose. As he adjusts to this 6 6
event, he will consume:
12 15
a. more peanut butter and less broccoli.
b. less peanut butter and less broccoli. 7 7
c. more peanut butter and more broccoli. 8 10
d. less peanut butter and more broccoli. 8 8
e. less peanut butter and the same amount of broccoli.
12. David's marginal utilities for milkshakes and burgers are
11. Jackson spends all his income on baseball cards and given in the table. The price of milkshakes is $2, and the
candy. At his current consumption bundle, the marginal price of burgers is $5. If David's income is $22, how many
utility of baseball cards is 20 and the marginal utility of milkshakes and how many burgers does he buy to maximize
candy is 10. If the price of baseball cards is $10, and the his utility?
price of candy is $2, a. 1 shake and 1 burger
a. Jackson should increase his consumption of baseball cards b. 6 shakes and 0 burgers
and decrease his consumption of candy. c. 5 shakes and 1 burger
b. Jackson should increase his consumption of candy d. 6 shakes and 2 burgers
and decrease his consumption of baseball cards. e. 1 shake and 4 burgers
c. Jackson is maximizing his utility, and he should continue to
consume the current bundle.
d. Jackson should consume equal amounts of baseball cards
and candy.
e. Jackson should increase his consumption of candy and
increase his consumption of baseball cards.

13. For each of the following situations, decide whether Al has increasing, constant or diminishing marginal utility.
a. The more economics classes Al takes, the more he enjoys the subject. And the more classes he takes, the easier each
one gets, making him enjoy each additional class more than the one before.

b. Al likes loud music. In fact, according to him, “the louder, the better.” Each time he turns the volume up a notch, he
adds 5 utils to his total utility.

c. Al enjoys watching reruns of the old sitcom Friends. He claims that these episodes are always funny, but he does admit
that the more times he sees an episode, the less funny it gets.
 d. Al loves toasted marshmallows. The more he eats, however, the fuller he gets and the less he enjoys each additional
marshmallow. And there is a point at which he becomes satiated: beyond that point, more marshmallows actually
make him feel worse rather than better.

14. Assume that Mary has an income of $130 and that gasoline costs $10 per unit and food costs $20 per unit. Complete the table below and use
the information to analyze Mary’s choice between gasoline and food.
Marginal utility per dollar spent Marginal utility per dollar spent
on gasoline on food
Quantity of Marginal Marginal Quantity of Marginal Marginal
Gasoline Utility Utility per $ Food Utility Utility per $
1 60 6.0 1 115 5.75
2 55 5.5 2 105 5.25
3 51 5.1 3 98 4.90
4 48 4.8 4 94 4.70
5 47 4.7 5 92 4.60
6 46 4.6 6 90 4.50

If the prices of two goods differ, as they do with gasoline and food, then Mary will adjust his consumption until the marginal utilities
per dollar spent are equal. Put another way, the optimal consumption bundle occurs where:

a. Does the combination G=1 and F=6 satisfy the income constraint?

b. Is this the utility maximizing combination of goods? Why or why not?

c. In which direction would Mary like to reallocate her purchases (i.e., Mary would like to buy more gasoline and less food)?
Why?

d. What is Mary’s utility maximizing combination of goods, subject to the income constraint of $130?

15. For each of the following situations, decide whether the bundle Shani is considering is optimal or not. If it is not optimal, how
could Shani improve her overall level of utility? That is, determine which good she should spend more on and which good she
should spend less on.
a. Shani has $200 to spend on sneakers and sweaters. Sneakers cost $50 per pair, and sweaters cost $20 each. She is
thinking about buying 2 pairs of sneakers and 5 sweaters. She tells her friend that the additional utility she would get
from the second pair of sneakers is the same as the additional utility she would get from the fifth sweater.
b. Shani has $5 to spend on pens and pencils. Each pen costs $0.50 and each pencil costs $0.10. she is thinking about
buying 6 pens and 20 pencils. The last pen would add five times as much to her total utility as the last pencil.

c. Shani has $50 per season to spend on tickets to football games and tickets to soccer games. Each football ticket costs
$10, and each soccer ticket costs $5. She is thinking about buying 3 football tickets and 2 soccer tickets. Her marginal
utility from the third football ticket is twice as much as her marginal utility from the second soccer ticket.