Question

1. The table below describes Ben’s preferences over cake and ice cream. The utility from consumption...

1. The table below describes Ben’s preferences over cake and ice cream. The utility from consumption of one good is independent of the consumption of the other. The price of cake is $10 per unit and the price of ice cream is $4 per unit. Units MU MU Consumed Cake Ice Cream 1 80 20 2 60 19 3 40 18 4 20 17 5 0 16 2. If Ben has $50 to spend, the optimal combination of these goods is: a. 4 units of cake and 1 unit of ice cream b. 3 units of cake and 5 units of ice cream c. 3 units of cake and 1 unit of ice cream d. 5 units of cake e. none of the above

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Answer #1

Correct Answer:

B.3 units of cake and 5 units of ice cream

Working note:

Units

MU Cake

MU Cake / dollar

MU ice-cream

MU ice-cream / dollar

1

80

8

20

5

2

60

6

19

4.75

3

40

4

18

4.5

4

20

2

17

4.25

5

0

0

16

4

On the basis of above tabular data, the utility is maximized when those items are consumed first whose MU/ dollar is maximum.

On this basis, the 3 units of cake and 5 units of ice-cream will be consumed.

Total budget spent = 3*10 +5*4 = $50 = Budget allocated.

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