Chapter 6 - (30 points)
3. If a person consumes fewer units of a good, will marginal utility of the good increase as total utility decreases? Why or why not?
Yes, it will, as long as the marginal utility of the units of the good no longer consumed was not negative. To illustrate, suppose the situation is as shown in Exhibit 1a. If the consumer consumes 5 units of good X, total utility is 40 utils and marginal utility is 6 utils. If she consumes one less unit of good X, or 4 units, total utility drops to 34 utils but marginal utility rises to 7 utils. (5 points)
4. If the marginal utility of good A is 4 utils and its price is $2 and the marginal utility of good B is 6 utils and its price is ...view middle of the document...
1. The marginal utility for the third unit of X is 60 utils and the marginal utility for the fourth unit of X is 45 utils. If the law of diminishing marginal utility holds, what is the minimum total utility?
We can’t tell for certain, except that it is greater than 105 utils. The first units consumed of the good might have lower marginal utilities than units three and four, as long as the MU’s of those units are higher than the MC of purchasing them. The law of diminishing marginal utility does not say that MU always starts high and declines, only that at some point it will decline. (5 points)
3. The total utilities of the first five units of good X are 10, 19, 26, 33, and 40 utils, respectively. In other words, the total utility of one unit is 10 utils, the total utility of two units is 19, and so on. What is the marginal utility of the third unit?
Marginal utility = (TC/(Q = (26 utils – 19 utils)/1 = 7 utils. (5 points)
4. If George spends $5 (total) a week on good X and good Y, and if the price of each good is $1 per unit, then how many units of each good does he purchase to maximize utility?
George will buy the units with the highest marginal utility. He will buy unit one of good X (20 utils), then unit one of good Y (19 utils), then unit two of good X (15 utils), then unit two of good Y (13 utils) and then unit three of good X (13 utils). So he buys $3 worth of good X and $2 worth of good Y. (5 points)
5. Given the number of units of each good George purchased in Question 4, what is his total utility?
TU = (MU. So TU = 20 + 19 + 15 + 13 + 13 = 80 utils. (5 points)