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Utility Problems

Utility Problems

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Utility Problems

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  1. Utility Problems ECO 284 - Microeconomics - Dr. D. Foster

  2. UtilityProblems Buying gyros & sodas at the county fair. If these were free … “Buy” G1, G2, G3, S1, S2, S3, S4 and stop. Total utility = 200+80+70+52.5+45+25+18.75 = 491.25 utils But, they aren’t free …

  3. UtilityProblems Buying gyros & sodas at the county fair.You have $10 and MU$=30 utils. When the Pgyro=$2.50 and Psoda=$.75 … Buy G1, S1, S2, S3, G2 and stop, saving $2.75. Total utility = 200+52.5+45+25+80 + 82.5 = 485 utils There is no other combination with a higher utility… Save all $10? TU = 300.Buy 1 of each, save $6.75? TU = 455

  4. UtilityProblems Buying gyros & sodas at the county fair.You have $10 and MU$=30 utils. When the Pgyro=$2.50 and Psoda=$1.00 … Buy G1, S1, S2, G2 and stop, saving $3.00 Total utility = 200+52.5+45+80 + 90 = 467.5 utils Substitution effect: Buy less sodas, buy more … $ in pocket. Income effect: Higher prices means lower living standard.

  5. UtilityProblems Buying gyros & sodas at the county fair.You have $10 and MU$=30 utils. When the Pgyro=$2.00 and Psoda =$.75… Buy G1, S1, S2, S3, G2, G3 and stop, saving $1.75 Total utility = 200+52.5+45+25+80+70+52.5 = 525 utils Substitution effect: Buy more gyros, keep less … $ in pocket. Income effect: Lower prices means higher living standard.

  6. UtilityProblems Buying pizza and root beer. If these were free … “Buy” 6 slices of pizza and 6 mugs of root beer. Total utility = 80 utils But, they aren’t free …

  7. UtilityProblems #2. Pizza=$1 and root beer is $.50 Buying pizza and root beer. a. MU of $ is 0 and you hold $6 … Buy RB1, RB2, P1, P2 & RB3, P3, P4 & RB4 … keep $0 TU = 44 + 28 = 72 utils

  8. UtilityProblems #2. Pizza=$1 and root beer is $.50 Buying pizza and root beer. b. MU of $ is 5 and you hold $10 … Buy RB1, RB2, P1, P2 & RB3, P3, P4 & RB4 … keep $4 TU = 44 + 28 + 20 = 92 utils

  9. UtilityProblems #2. Pizza=$1 and root beer is $.50 Buying pizza and root beer. c. MU of $ is 9 and you hold $2 … Buy RB1, RB2, P1 and stop … spent everything If you could, you’d borrow $ from someone to buy more. TU = 18 + 14 = 32 utils

  10. UtilityProblems #3. Pizza=$1.50 and root beer is $.50 Buying pizza and root beer. MU of $ is 5 and you hold $10 … Buy RB1, RB2, RB3, P1, P2 & RB4, P3, P4 … keep $2 TU = 44 + 28 + 10 = 82 utils Substitution effect: “buy” less money in your pocket. Income effect: Buy a lower living standard (82 utils vs. 92)

  11. UtilityProblems #4. All you can eat buffet for $4.50 Buying pizza and root beer. Need to know … TU of $4.50 … we know TU of meal (80). TU of $4.50 = 45; worth buying, since we gain 80 utils from the meal. If MU of $1 is 10? TU of $4.50 = 90; not worth buying, since we gain only 80 utils from the meal. If MU of $1 is 20?

  12. Utility Problems ECO 284 - Microeconomics - Dr. D. Foster