1. Dirk spends $20 each week on muffins (price = $2) and bagels (price = $1). This week he bought four muffins and ______bagels. The marginal utility of muffins is 30 utils and the marginal utility of bagels is 10 utils. Dirk would have reached a higher utility level by purchasing ______ (more/fewer) muffins and ______ (more/fewer) bagels.
2. Choosing a Protein Beverage. Consider a consumer who must choose between two protein drinks, A and B. The following table shows the protein content and prices for the two drinks.
a. Fill in the blanks in the table. Which beverage generates the largest bang (protein content) per dollar? Which is the better choice for a consumer whose utility from the product depends only on the protein content?
b. Suppose the government imposes a tax of $4 on beverage B, and the price increases by the amount of the tax. How will the consumer respond?
3. Bundling TV Channels. Your monthly budget for entertainment is $48, and your entertainment goods are cable TV and arcade games. The price of arcade games is $1 each.
a. Suppose the cable company has a price of $4 per channel. Draw your budget line.
b. The following table shows the marginal utilities for different combinations of channels and games. Fill in the blanks and find the utility-maximizing combination.
c. Suppose the cable company switches from per channel pricing to a bundle plan: You get six stations for a cost of $24 per month, but zero stations if you don t pay the full $24. In other words, the company tells you to take it (six stations) or leave it (zero stations). Identify the new budget points on your graph. Does the switch make you worse off or better off?
4. Utility-Maximizing Rides and Games. Suppose the price of amusement rides is $2 and the price of a video arcade game is $1. The following table shows points on the budget line (given an income of $30) and the associated marginal utilities. Fill in the blanks in the table. Then draw the budget line and find the utility maximizing combination of rides and games.
5. Consumer Consultant. You have been hired to determine whether a consumer is maximizing his utility. He has a fixed budget of $2,500 per month to spend on food and housing. The price of food is $1 per pound, and the price of housing is $3 per square foot of living space. He currently lives in a 600-square foot apartment and spends $700 on food.
a. You can ask your client two questions only two. What are your questions?
b. Your client s answers indicate that he is indeed maximizing utility. What are his answers?
6. Using MRI to Measure Utility. Your firm uses an MRI machine to measure blood flow within the brain, allowing the measurement of the satisfaction level of a consumer before and after consuming a product. Your job is to determine whether the firm spent its holiday party budget wisely on cookies and punch. The firm?s objective is to maximize the utility of the typical employee.
a. Give an example of information that would suggest the firm should have provided more cookies and lesspunch.
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