Worksheet for Unit 5 – Consumer Choice and Optimization
Getting the Most from Edd’s Dinner Budget
Edd likes to eat out in restaurants and he tries to do so as often as his budget will allow. Whenever Edd does eat dinner in a restaurant, he only considers two possible meals: a steak dinner or a pasta dinner. He clearly prefers steak to pasta, but unfortunately, steak is more expensive than pasta. Also, while he prefers a steak dinner to pasta, he also values having some variety. We have gathered data on the prices that Edd faces in table 1. In table 2, the calculations for his total spending have already been done for you. If you decide Edd should have 2 steak dinners and 1 pasta dinner, then just find the column for 1 pasta dinner and the row for 2 steak dinners. It tells you how much Edd must spend to buy those dinners. Next, we have in table 3, an estimate of Edd’s utility, including estimates of total utility and marginal utility according to quantity of each type of dinner. This table is incomplete. You must supply the missing calculations from what is given. Finally, we have provided in table 4 a calculation of the ratio of the marginal utilities from table 3.
After calculating the missing data in tables 2, 3, and 4, you need to answer the questions.
If you wish, you can download these data tables as a .csv file that can be opened in Excel or similar spreadsheets. Download as .csv file.
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Questions (you enter your answers in the Learning Management System for your school):
- What is the marginal utility of the fifth steak dinner?
- What is the total utility from consuming 4 pasta dinners?
- What is the total spending if Edd chooses to buy 7 steak dinners and 4 pasta dinners? (enter number only without dollar sign)
- What is the ratio of the marginal utilities of the 5th steak dinner to the 6th pasta dinner? (MUsteak / MUpasta)
- Consider only steak dinners, using only tables 1 and 3. Suppose Edd considers every dollar he spends to have an opportunity cost of 15 units of utility. In other words, Edd believes that $1.00 will buy him 15 units of utility from goods other than steak dinners. Given this information, how many steak dinners should Edd buy to maximize his utility?
- If Edd has $ 65 total to spend on steak dinners and pasta dinners, then what combinations of # of steak dinners + # of pasta dinners would he be able to buy, or in other words, use his budget to the limit? (assume he wants to spend all of the money, and assume all answers below are # of steak dinners first and then # of pasta dinners)
- What is the ratio of the two prices – in other words, Psteak / Ppasta = ?
- Edd wants optimize the mix of steak vs. pasta. He figures (correctly) that by choosing a combination of steak dinners and pasta dinners where the ratio of the Marginal Utilities is the same as the ratio of the prices, he will allocate his budget properly between steak and pasta. What combinations of steak dinners and pasta dinners will achieve exactly the same ratio of marginal utilities as of prices? (assume all answers are # of steaks and then # of pasta dinners)(check all that apply)
- Consumers maximize utility when they use their budget to the limit and allocate the budget properly between products according to current prices. Using the information from these tables and the answers you gave to the previous 3 questions, how many steak dinners and pasta dinners should Edd plan to buy to maximize his utility? (assume all answers are # of steaks and then # of pasta dinners)
- Suppose Edd is consuming according to your conclusions in the previous question. Now suppose Edd finds and additional $10 to spend, increasing his budget. Do you expect he will choose to buy 2 more pasta dinners or 1 additional steak dinner? (hint: you only need your answer to the previous question and table 3 to answer this). Your options are:
- 2 more pasta dinners
- 1 more steak dinner
- neither choice will make him better off