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La 5

David has $40 total income and wants to purchase movies costing $8 each or soda costing $4 per unit. The document shows David's utility maximization choices in a table based on total utility. It indicates that when the movie price is $8, David's optimal choice is to buy 2 movies and 4 units of soda for a total utility of 315. The questions then ask to identify David's optimal choice using the marginal utility per dollar approach and how his choice would change if the movie price fell to $4 while soda remained $4.

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MaiHuong Nguyen
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21 views2 pages

La 5

David has $40 total income and wants to purchase movies costing $8 each or soda costing $4 per unit. The document shows David's utility maximization choices in a table based on total utility. It indicates that when the movie price is $8, David's optimal choice is to buy 2 movies and 4 units of soda for a total utility of 315. The questions then ask to identify David's optimal choice using the marginal utility per dollar approach and how his choice would change if the movie price fell to $4 while soda remained $4.

Uploaded by

MaiHuong Nguyen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Learning Activity 5

Name: Nguyen MaiHuong ID:2020031016

Suppose David total income is $40 and he wants 2 products, Movies and Soda. The price of
Move and Soda is $8 and $4, respectively. The following table shows his utility maximization at
C using total utility approach.
David Utility Maximization Choices
Combinatio Movies $8 Total Utility Soda $4
n from Movies
Quantity Total Utility Total Utility Quantity
and Soda
A 0 0 260 260 10
B 1 50 298 248 8
C 2 90 315 225 6
D 3 122 305 183 4
E 4 150 273 123 2
F 5 176 176 0 0

Question 1
Applying Marginal Utility per Dollar approach using the above table, show David utility
maximization choice/compbination.
Answer:

Qm TUm MUm MUm/Pm Qs TUs MUs MUs/Ps

0 0 - - 0 0 - -

1 50 50 12.5 2 123 123 30.75

2 90 40 10 4 183 60 15

3 122 32 8 6 225 42 10.5


4 150 28 7 8 248 23 5.75

5 176 26 6.5 10 260 12 3

Question 2
With no change in David income ($40) and no change in the price of soda ($4), the price of a
movie falls from $8 to $4. How does David change his buying plans?
Answer:
Price of soda, Ps = $4

Price of movie, Pm = $4

Income, Y = $40

So, budget constraint;

Pm M + Ps S = Y

=> 4M + 4S = 40

=> M + S = 10

Consumer's utility is maximised where: MUm/Pm = MUs/Ps

This condition is satisfied at bundle;

Movie, M = 2

Soda, S = 6

Putting in budget constraint: 6 + 2 = 8 10

Therefore, this bundle is affordable.

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