Chapter 51, Problem 1FRQ

a)

To determine

Labeled budget line on the graph

Explanation of Solution

Labeled budget line on the graph:

  

Economics Concept Introduction

Introduction: A budget line is the graphical presentation of a price line that shows possible combination of goods that can be bought at various costs or different levels of income.

b)

To determine

Marginal utility and Marginal utility per dollar spent on fourth drink

Explanation of Solution

Snacks ($4)			Drinks ($2)
Q	Total utilities	Marginal utility	Q	Total utilities	Marginal utility
1	15		1	12
2	25	10	2	21	9
3	31	6	3	29	8
4	34	3	4	36	7
5	36	3	5	42	6
			6	47	5
			7	50	3
			8	52	2

Marginal utility for fourth unit of drink is 7,

  $\begin{array}{l}\text{marginal utility per dollar = marginal utility÷Price}\hfill \\ =7÷2\hfill \\ \text{ = }3.5\hfill \end{array}$

And, marginal utility per dollar is 3.5

Economics Concept Introduction

Introduction: Marginal utility refers to the benefit or satisfaction of person by consuming one additional unit of the good.

c)

To determine

Optimal consumption rule

Explanation of Solution

According to the optimal consumption rule, the marginal utility per dollar spend is the same for each product when the consumer enjoys the maximum utility by consuming or using goods or resources.

Economics Concept Introduction

Introduction: Optimal consumption is the maximum utility that a person can gain from consuming a resource.

d)

To determine

Drinks and snacks that should be purchased to maximize the utility

Explanation of Solution

To maximize the utility, 2 snacks, 6 drinks should be purchased because the total spending is $20 and by spending $8 on snacks and $12 on drinks one can enjoy the maximum utility.

Economics Concept Introduction

Introduction: Marginal utility refers to the benefit or satisfaction of person by consuming one additional unit of the good.