Question

1a. Joy, who has an income of $40, can spend her income on 2 different goods, smoothies and energy bars. Energy bars cost $2 each, and smoothies cost $4 each. Draw her budget line.

1b. Can she buy 10 energy bars and 5 smoothies? Why or why not?

1c. The following table shows her utilities from smoothies and energy bars. 2

Quantity of smoothies	Utility from smoothies	Marginal utility	MU / Price of smoothies	Quantity of energy bars	Utility from energy bars	Marginal utility	MU/Price of energy bars
0	0			0	0
1	32			2	28
2	60			4	52
3	84			6	72
4	104			8	88

Calculate the marginal utility of each energy bar and the marginal utility of each smoothie. Then calculate the marginal utility of dollar spent on energy bars and marginal utility per dollar spent on smoothies.

1d. Using the utility maximizing principle of marginal analysis, predict which bundle Joy will choose.

2. Marty produces frozen yogurt using fixed and variable inputs. P_labour = $80 per unit per day. Fixed cost = $100 per day

Quantity of labour	Quantity of frozen yogurt (cups)	Marginal product of labour	Fixed cost	Variable cost	Total cost	Marginal cost
0	0
1	110
2	200
3	270
4	300
5	320
6	330

Fill in the marginal product column in the table. Why does marginal product decline as the number of workers increases?

What is Marty’s variable cost and total cost when he produces 110 cups of yogurt? 200 cups? Calculate variable cost and total cost for every level of output. Do the same for marginal cost.

Answer 1