Asked by Nazwa Al-Sayeed on Jun 09, 2024
Verified
Refer to Scenario 3.1. If the price of potato chips is $0.50 and the price of Cola is $4.00, and Andy has an unlimited income, how many units of potato chips will he consume?
A) 5
B) 6
C) 7
D) 8
E) none of the above
Marginal Utility
The extra pleasure or benefit a person receives from using an additional unit of a product or service.
Unlimited Income
A theoretical concept implying an income level with no upper limit, allowing for an unrestricted ability to purchase goods and services.
Potato Chips
Thin slices of potato that are deep fried or baked until crispy, often served as a snack.
- Acquire knowledge on the significance of marginal utility in influencing consumer preferences.
Verified Answer
MU of potato chips / price of potato chips = MU of Cola / price of Cola
Plugging in the given marginal utilities and prices, we get:
(6 / 0.5) = (18 / 4)
12 = 4.5
This is not true, so Andy should not consume an equal amount of both goods. Instead, he should consume more potato chips, as they have a higher marginal utility per dollar spent. To find the optimal consumption of potato chips, we can use the marginal utility of the last unit consumed of each good:
MU of last potato chip = 6
MU of last Cola = 2
Since the price of potato chips is $0.50, which is less than the marginal utility of the last unit consumed, Andy should consume more potato chips. We know that Andy will not stop consuming potato chips until the marginal utility falls below $0.50. So, Andy will consume potato chips until the point where the marginal utility of potato chips is equal to $0.50, which occurs at 6 units. Therefore, the answer is B) 6 units of potato chips.
Learning Objectives
- Acquire knowledge on the significance of marginal utility in influencing consumer preferences.
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