Economics Principles For A Changing World
Economics Principles For A Changing World
4th Edition
ISBN: 9781464186660
Author: CHIANG, Eric P.
Publisher: Worth Publishers,
Question
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Chapter 6, Problem 16QP

(a)

To determine

Complete the table.

(a)

Expert Solution
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Explanation of Solution

Marginal utility is the additional unit of satisfaction derived from the consumption of one more additional unit of goods and services. It can be calculated by substituting each value in the following equation:

Marginal Utility=Total UtilityPresentTotal UtilityPrevious (1)

For calculating marginal utility from total utility, substitute the values in Equation (1) with the help of Table 1.

Marginal Utility=1400=140

Thus, the marginal utility for the first additional unit of the first-run movie is 140. Likewise, each marginal utility can be calculated by substituting each value in Equation (1). It is shown in Table 1.

Table 1

First-Run MoviesBottles of Wine
QuantityTotal UtilityMarginal UtilityQuantityTotal UtilityMarginal Utility
000000
11401401180180
22601202340160
33601003460120
444080451050
550060554030
Economics Concept Introduction

Marginal utility: Marginal utility refers to the additional unit of satisfaction derived from the consumption of one more additional unit of goods and services.

(b)

To determine

Utility maximizing combination of the first-run movies and wine.

(b)

Expert Solution
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Explanation of Solution

The consumer spends $50 for entertainment and wine per month, where the price for both movie and a bottle of wine is $10. The utility is the maximization of a consumer, which is at the point where the last dollar spent on both the commodities provides the same level of marginal utility of dollar. This can be calculated by dividing each marginal utility with price of the commodity. Marginal utility per dollar is shown in Table 2.

Table 2

First-Run MoviesBottles of Wine
QuantityMarginal UtilityMarginal Utility per Dollar (P=$10)QuantityMarginal UtilityMarginal Utility per Dollar (P=$10)
000000
114014118018
212012216016
310010312012
48084505
56065303

Thus, the utility maximizing combination of the consumer is 2 movies and 3 bottles of wine, where he gets the same level of marginal utility per dollar.

Economics Concept Introduction

Utility maximization: The utility is maximized at the point where the last dollar spent on both the commodities provides the same level of marginal utility of the dollar.

Marginal utility: Marginal utility refers to the additional unit of satisfaction derived from the consumption of one more additional unit of goods and services.

(c)

To determine

Equilibrium allocation between movie and wine when the price of wine decreases.

(c)

Expert Solution
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Explanation of Solution

When the price of wine decreases to $5 per bottle, the consumer will watch 3 movies and consume 4 bottles of wine at $50. This is because the consumer will not purchase goods when marginal utility per dollar is lower than its price.

Thus, consumer’s equilibrium allocation between movie and wine is 3 and 4, respectively.

Economics Concept Introduction

Marginal utility: Marginal utility refers to the additional unit of satisfaction derived from the consumption of one more additional unit of goods and services.

(d)

To determine

Calculate the elasticity of demand for wine.

(d)

Expert Solution
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Explanation of Solution

When the price of wine decreases as $5, the consumer will buy 4 bottles of wine instead of 3. The elasticity of demand for wine using the midpoint method can be calculated using the following formula:

ElasticityMidpoint formula=(QuantitynewQuantityold)(Quantitynew+Quantityold2)(PricenewPriceold)(Pricenew+Priceold2) (1)

For calculating the elasticity of demand for wine, substitute the respective values in Equation (1).

Elasticity of wine=(43)(4+32)(105)(10+52)=1725152=13.557.5=0.2850.667=0.427

Thus, the elasticity of demand for wine is 0.427.

Economics Concept Introduction

Elasticity of demand: Elasticity of demand refers to the responsiveness or the change in quantity demanded due to the change in price.

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