Question

a. Suppose my marginal utility from chia pets is 60 and my marginal utility from sea monkeys is 30. The price of a chia pet is $10 and the price of a sea monkey is $5. What should I do to maximize my utility? Explain your answer. b

c. You have bought a $10 ticket in advance for the university soccer game, a ticket that cannot be resold. You know that going to the soccer game will give you a benefit equal to $20. After you have bought the ticket, you hear that there will be a professional baseball post-season game at the same time. Tickets to the baseball game cost $20, and you know that going to the baseball game will give you a benefit equal to $35. You tell your friends the following: “If I had known about the baseball game before (OVER) buying the ticket to the soccer game, I would have gone to the baseball game instead. But now that I already have the ticket to the soccer game, it’s better for me to just go to the soccer game.” Are you making the correct decision? Justify your answer by calculating the benefits and costs of your decision.

Answer 1

a)

Marginal Utility from chia pets=MUc=60

Price of chia pet=Pc=$10

Marginal Utility from sea monkeys=MUs=30

Price of sea monkey=Ps=$5

Marginal utility per dollar spent in case of chia perts=MUc/Pc=60/10=6

Marginal utility per dollar spent in case of sea monkeys=MUs/Ps=30/5=6

We can see that (MUc/Pc)=(MUs/Ps).

It is a state of utility maximization. Subject to availability of budget/affordability , purchases can be made.

c)

Net benefit if one goes to soccer game=Benefit-Cost=20-10=$10

Net benefit if one goes to baseball game=Benefit-Cost=35-(20+10)=$5

In this case cost will be equal to sum of cost of both tickets. as first ticket cannot be resold.

We can see that net benefit is lower in case of baseball in present situation. Decision of going to soccer game is correct