Answered: Suppose that as a consumer you have $34…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that as a consumer you have $34 per month to spend for munchies, either on pizzas which cost $6 each or on twinkies which cost $4 each. Suppose further that your preferences are given by the following total utility table. 1 2 3 4 5 6 7 TU for Pizza 60 108 138 156 162 166 166 TU for twinkies 44 76 100 120 136 148 152 First, graph the budget constraint with pizzas on the horizontal axis and twinkies on the vertical axis. What are the intercepts and slope of the opportunity cost? Express the budget constraint as an algebraic equation for a line. Next, should you purchase a twinkie first or a pizza first to get the “biggest bang for the buck”? How can you tell? (Hint: use the utility maximizing rule.) What should you purchase? Next, use the utility maximizing rule to identify the consumer equilibrium, that is, what combination of twinkies and pizzas will maximize your total utility. (Hint: What should you purchase second, third, etc. until you exhaust your budget?) Confirm that the consumer equilibrium generates the highest combined total utility of any affordable combination of goods. E.g., compute the total utility of some other affordable combinations of twinkies & pizzas and compare with the consumer equilibrium.

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