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Question 14 A consumer has a budget of $60 and wishes to purchase both products A...

Question 14

A consumer has a budget of $60 and wishes to purchase both products A and B. The price of product A is $8.42, while the price of product B is $26.32. The marginal utilities of the two products are provided in the table below.

Q

MUA

MUB

1

17

25

2

14

24

3

11

23

4

8

22

5

5

21

6

2

20

7

0

19

8

0

18

9

0

17

10

0

16


The optimal bundle is ____ of product A and ____ of product B.

A.

5 ; 1
B.

3 ; 2
C.

5 ; 2
D.

4 ; 1
E.

2 ; 0
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Homework Answers

Answer #1

Given Consumer Income = $60

Price of product A = $8.42

Price of product B = $26.32

The optimal bundle will be the one when MUA/PA = MUB/PB

Q MUA/PA MUB/PB
1 2.02 0.95
2 1.66 0.91
3 1.31 0.87
4 0.95 0.84
5 0.59 0.80
6 0.24 0.76
7 0.00 0.72
8 0.00 0.68
9 0.00 0.65
10 0.00 0.61

If the Consumer buys 4 units of product A and 1 unit of product B,

his total spending will be 4*8.42 + 1*26.32 = 33.68 + 23.32 = $60.

The total utility = 17 + 14 +11 +8 +25 = 75.

Therefore, the optimal bundle is 4 of product A and 1 of product B.

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