Question

1. Anita consumes both pizza and Pepsi. The following tables show the amount of utility she obtains from different amounts of these two goods:

Slices of Pizza	Utility from Pizza	Cans of Pepsi	Utility from Pepsi
4	115	5	63
5	135	6	75
6	154	7	86
7	171	8	96

1. Suppose Pepsi costs $0.50 per can, pizza costs $1 per slice, and Anita has $9 to spend on food and drink. What combination of pizza and Pepsi will maximize her utility?

2. If MU/P = 8 for pizza, and the MU/P = 5 for Pepsi, is Anita maximizing her utility? If not, what should she do to maximize her utility?

Answer 1

Marginal Utility is claculated as = Total utility from current consumption - Total utility from previous consumption

Marginal Utility per dollar = Marginal Utility / Price

Slice of Pizza	Utility from Pizza	Marginal Utility	Marginal Utility per dollar	Can of Pepsi	Utility from Pepsi	Marginal Utility frm Pepsi	Marginal Utility per dollar
4	115	-	-	5	63	-	-
5	135	20	20	6	75	12	24
6	154	19	19	7	86	11	22
7	171	17	17	8	96	10	20

If total Income is $9, she can consume various combinations:

6 slice of pizza and 6 cans which will spend total 6 * 1 + 6 * 0.5 = 9. Marginal Utility from it is 19 + 24 = 43

5 slice of pizza and 8 cans which will spend total 5 * 1 + 8 * 0.5 = 9. Utility from it is 20 + 20 = 40

Thus, utility is maximized when 6 slice of pizza and 6 cans are consumed.