An economist's eight-year-old son gave his parents the following utility tables and then told them that he would like Santa to give him presents that have the maximum possible marginal utility per dollar. Santa has a budget of $60 per child. If action figures cost Santa $10 to produce and squirt guns cost Santa $15 to produce, what presents should Santa deliver this year?
To determine the maximum marginal utility per dollar, we need to calculate the marginal utility per dollar for each item.
Action figures:
Marginal utility of the first action figure = 10
Marginal utility of the second action figure = 8
Marginal utility of the third action figure = 6
Marginal utility of the fourth action figure = 2
Total utility of 4 action figures = 10 + 8 + 6 + 2 = 26
Marginal utility per dollar of action figures = 26 / $40 = 0.65
Squirt guns:
Marginal utility of the first squirt gun = 12
Marginal utility of the second squirt gun = 4
Marginal utility of the third squirt gun = 2
Total utility of 3 squirt guns = 12 + 4 + 2 = 18
Marginal utility per dollar of squirt guns = 18 / $45 = 0.4
Therefore, Santa should deliver action figures to the economist's son as they offer a higher marginal utility per dollar compared to squirt guns.