Question

Given the following information on quantity consumed of prime rib steaks per month and total utility for Ryan James; answer the following: Quantity (in steaks per month) Total Utility (in dollars) 0 0 1 2 55 75 3 90 4 95 5 99 a) What is the Marginal Utility for each additional prime rib steak? b) At a price of $18 per prime rib steak, how many steaks a month should Ryan James purchase to optimize his satisfaction? c) What is his consumer surplus at this optimal level of consumption? SHOW ALL WORK

Answer 1

(a)

Quantity	Total Utility	Marginal Utility.
0	0	-----
1	55	55
2	75	20
3	90	15
4	95	5
5	99	4

Marginal Utility is the change in total utility due to change in quantity.

Marginal Utility = (Change in Total Utility / Change in Quantity)

(b) Ryan James will buy the rib steak till the marginal utility is higher than or equal to price of rib (i.e., $18).

Till 2 units of steak marginal utility is higher than the price of rib steak.

So, Ryan James will purchase 2 units of rib steaks to optimize his satisfaction.

(c) Marginal utility represent the maximum willingness to pay for a good.

Consumer surplus = Sum of (Maximum willingness to pay - Actual Price)

Consumer surplus = (55 - 18) + (20 - 18)

Consumer surplus = 37 + 2

Consumer surplus = 39