Question

Suppose that as a consumer you have $34 per month to spend on munchies—either pizzas, which cost $6 each, or Twinkies, which cost $4 each. Suppose further that your preferences are given by the following total utility table. Create a set of marginal utility tables for each product, like the ones below. Remember that they must show diminishing marginal utility as more of each product is consumed. Create the corresponding set of total utility tables for each product. Graph the budget constraint with Pizzas on the horizontal axis and Twinkies on the vertical axis. What are the intercepts? Can you express the budget constraint as an algebraic equation for a line?

# of Pizzas	1	2	3	4	5	6	7
Marginal Utility
Total Utility	60	108	138	156	162	166	166

# of Twinkies	1	2	3	4	5	6	7
Marginal Utility
Total Utility	44	76	100	120	136	148	152

Should you purchase a Twinkie first or a Pizza first to get the “biggest bang for the buck”? How can you tell? What should you purchase second, third, etc. until you exhaust your budget?

Confirm that the combination of Twinkies and Pizzas you end up with will maximize your total utility by computing the total utility from other points on the budget line and comparing them to what you chose.

Answer 1