Question

Lisa spends all her income on pizzas and soda. The table below shows Lisa’s marginal utility for pizza and marginal utility for soda. If the price of pizza is $10, the price of soda is $5, and Lisa has $40 to spend on the two goods:

1. State the equation of Lisa’s equilibrium.
2. Construct a table based on the equation from the table below.
3. How much is the marginal utility per dollar at equilibrium?
4. What combination of the two goods will maximize her total utility? (Explain your answer.)

4 sodas 2 pizzas

Lisa will get more with 2,4 than she would with 1,3

10(1)+5(3)-25<40 affordable

10(2)+5(4)-40=40 affordable

10(4)+5(5)-65>40 not affordable

5. How much is the total utility acquired from the combination of the two goods? (Show your work.)

Units               MU of Soda                MU of pizza

1                      150                              200

2                      120                              180

3                      100                              150

4                      90                                120

5                      60                                100

6                      40                                60

Answer 1

Units	MU of Soda	MU of Pizza	MU/P (Soda)	MU/P (Pizza)
1	150	200	30	20
2	120	180	24	18
3	100	150	20	15
4	90	120	18	12
5	60	100	12	10
6	40	60	8	6

For equilibrium, two conditions must be satisfied : 1)MU/P(Soda) = MU/P(Pizza)

2) The expenditure on both must be equal to income.

There conditions are satisfied at 4 units of Soda and 2 units of Pizza.

The total expenditure will be 4*5 + 2*10 = $40

Thus, this is the equilibrium combination, 4 units of soda and 2 units of Pizza.

The marginal utility per dollar at Equilibrium is 18. (Mu/P)

Total utility acquired is

Marginal utility of soda*quantity of soda + marginal utility of pizza* quantity of pizza

90*4 + 180*2 = 720 utils