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EE104 (Problems)

This document discusses consumer behavior and the principle of diminishing marginal utility. It contains examples analyzing the total and marginal utility of different quantities of coffee. The examples show that total utility increases at a decreasing rate as consumption increases, demonstrating diminishing marginal utility. Based on the utility schedules and different price points, the number of cups a rational consumer would purchase is determined.

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Jerome Galang
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523 views

EE104 (Problems)

This document discusses consumer behavior and the principle of diminishing marginal utility. It contains examples analyzing the total and marginal utility of different quantities of coffee. The examples show that total utility increases at a decreasing rate as consumption increases, demonstrating diminishing marginal utility. Based on the utility schedules and different price points, the number of cups a rational consumer would purchase is determined.

Uploaded by

Jerome Galang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CONSUMER BEHAVIOR 3.

The table below contains information about the total utility


Jerry gains from coffee he buys from the Corner Shop.
1. Complete the table. Cups of Coffee 1 2 3 4 5
Unit Consumed Total Utility ($) Marginal Utility Total Utility, $ 1.50 2.70 3.60 3.60 2.00
0 0 - 3a. Does this example exhibit the Principle of Diminishing
1 10 10 Marginal Utility? Explain.
2 18 8 Answer: Yes, because the numbers in the bottom row
3 25 7 are steadily decreasing, which means each successive
4 30 5 cup is worth less than the previous one.
5 33 3
Cups of Coffee 1 2 3 4 5
6 34 1
Total Utility, $ 1.50 2.70 3.60 3.60 2.00
A. At which rate is total utility increasing: a constant
Marginal Utility, $ 1.50 1.2 0.9 0 -1.6
rate, a decreasing rate or an increasing rate?
Answer: Total utility increases, but at a decreasing
3b. How many cups of coffee will Jerry buy if the price of
rate. Because total utility clearly increases as more
each cup is $1? Why?
units are consumed. However, the rate of this
Answer:
increase is not constant and the numbers illustrating
 Marginal Approach:
the rate of increase are in the marginal utility
Cup #1: 1.50 > 1 (buy)
column.
Cup #2: 1.20 > 1 (buy)
B. (True or False). A rational consumer will purchase
Cup #3: 0.90 < 1 (not able to buy)
only one unit of the product represented by these
∴ 𝐽𝑒𝑟𝑟𝑦 𝑤𝑖𝑙𝑙 𝑏𝑢𝑦 2 𝑐𝑢𝑝𝑠.
data, since that amount maximizes marginal utility.
 Aggregate Approach:
Answer: The statement is false. Because the goal of
𝑂𝑛𝑒 𝐶𝑢𝑝: 1.50 − 1.00 = 0.50
consumption is to maximize consumer surplus and
𝑇𝑤𝑜 𝐶𝑢𝑝𝑠: 2.70 − (2 𝑥 1.00) = 0.70
not to maximize the marginal utility.
𝑇ℎ𝑟𝑒𝑒 𝐶𝑢𝑝𝑠: 3.60 − (3 𝑥 1.00) = 0.60
C. It is possible that a rational consumer will not
𝐹𝑜𝑢𝑟 𝐶𝑢𝑝𝑠: 3.60 − (4 𝑥 1.00) = −0.40
purchase any units of the product represented by
these data? 𝐹𝑖𝑣𝑒 𝐶𝑢𝑝𝑠: 2.00 − (5 𝑥 1.00) = −3.00
Answer: Yes, it is possible. The statement is true. ∴The best option is to buy two cups and get a total
The individual will buy no units if the utility from each surplus in the amount of 70 cents.
unit is smaller than the price. Therefore, for any price 3c. How many cups of coffee will he buy if the price of
above $10 a rational consumer with the given utility each cup is 50 cents? Why?
schedule will not purchase any units. Solution:
2. You are willing and able to pay 50 cents for today’s 1.50 > 0.50 (buy)
“Washburn Review”. The cost of printing the newspaper 1.20 > 0.50 (buy)
is 15 cents per copy, but you get one free. What is your 0 < 0.50 (not able to buy)
consumer surplus from the “Washburn Review”? ∴ Jerry will buy three cups.
Given:
Marginal Utility = 50 cents
Price = 0
Solution:
𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑆𝑢𝑟𝑝𝑙𝑢𝑠 = 𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑈𝑡𝑖𝑙𝑖𝑡𝑦 − 𝑃𝑟𝑖𝑐𝑒
𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑆𝑢𝑟𝑝𝑙𝑢𝑠 = 50 − 0
𝐶𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑆𝑢𝑟𝑝𝑙𝑢𝑠 = 50

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