Posted by Heidi on Tuesday, October 21, 2008 at 9:51am.
ok, say the marginal utility (MU) from the 2nd sneakers and 5th sweater is X. With the sneakers, she is $50 to get X, with the sweaters, she is spending $20 to get X. She MAY be better off if she spent more on sweaters and less on sneakers. (I say MAY because we don't know the MU of the 6th sweater and the purchase decision is lumpy (she cant buy 1 shoe or 1/2 of a sweater))
That said, in general, to maximize utility, a person should equate these two ratios MUx/MUy = Px/Py.
For each of the following situations, decide whether the bundle Lakshani is thinking about consuming is optimal or not. If it is not optimal, how could Lakshani improve her overall level of utility? That is, determine which good she should spend more on and which good should she spend less on (2-part answers)
a. Lakshani has $200 to spend on sneakers and sweaters. Sneakers cost $50 per pair, and sweaters cost $20 each. She is thinking about buying 2 pairs of sneakers and 5 sweaters. She tells her friend that the additional utility she would get from the second pair of sneakers is the same as the additional utility she would get from the fifth sweater.
b. Lakshani has $5 to spend on pens and pencils. Each pen costs $0.50 and each pencil costs $0.10. She is thinking about buying 6 pens and 20 pencils. The last pen would add five times as much to her total utility as the last pencil.
c. Lakshani has $50 per season to spend on tickets to football games and tickets to soccer games. Each football ticket costs $10 and each soccer ticket costs $5. She is thinking about buying 3 football tickets and 2 soccer tickets. Her marginal utility from the third football ticket is twice as much as her marginal utility from the second soccer ticket.
. Lakshani has $200 to spend on sneakers and sweaters. Sneakers cost $50 per pair, and sweaters cost $20 each. She is thinking about buying 2 pairs of sneakers and 5 sweaters. She tells her friend that the additional utility she would get from the second pair of sneakers is the same as the additional utility she would get from the fifth sweater.