Question

What is the marginal utility of an additional candy bar during the week if college student, often purchases candy bars or bags of potato chips between classes; he tries to limit his spending on these snacks to $8 per week. A bag of chips costs $0.75 and a candy bar costs $0.50 from the vending machines on campus. He has been purchasing an average of 6 bags of chips and 7 candy bars each week. Mr. Ahmed is a careful maximizer of utility, and he estimates that the marginal utility of an additional bag of chips during a week is 6. In your answers use B to denote candy bars and C to denote potato chips.

Answer 1

Answer - Marginal utility of additional candy bar is 4

Reason -

Let,

marginal utility of candy bars = MUB

price of candy bars = PB

marginal utility of potato chips = MUC

price of a bag of potato chips = PC

Then we want : MUC / PC = MUB / PB

We know that PC is $0.75 and PB equals $0.50. we are told that MUC is 6. Thus:

= 6 / 0.75 = MUB / 0.50

= 8 = MUB /0.5

= MUB = 8 * 0.5

= MUB = 4

So,

In order for the ratios of marginal utility to price to be equal, the marginal utility of a candy bar must be 4.