Consumer Choice and Utility
Purpose: This assignment demonstrates how "rational" consumer make choices that lead to the demand for goods and services. The key concepts are utility, diminishing marginal utility, and the consumer's budget.
Your name:__________________________
Your student number: ____________________
Your new number is:___________________
A =______5___ B=___3_______ C=____8______ D=____1_________
1. What is your student number?
2. What is your A?
3. What is your B?
4. What is your C?
5. What is your D?
Consider a consumer named Ajax with a budget of $100 dollars. The consumer has to spend all of his/her budget on "Buddz" or "Drankz". Buddz have a price of $10+$B per gram and Drankz have a price of $10 per litre.
For your budget line, put the number of Drankz on the horizontal axis.
6. What is the maximum amount of Buddz that Ajax can afford?
7. What is the maximum amount of Drankz that Ajax can afford?
8. If Ajax spends half of his budget on each item, how many Buddz will he buy?
9. What is the slope of Ajax's budget line?
For the next two questions, identify a combination of Drankz and Buddz that is unaffordable for Ajax and report its address (Drankz, Buddz), below.
10. Number of unaffordable Drankz:
11. Number of unaffordable Buddz:
12. How much does your "unaffordable bundle cost"?
13. Suppose Ajax's income doubles, what is the slope of his new budget line?
14. Suppose Ajax's income is falls to half of the original budget, what is the slope of his new budget line?
15. Suppose (for this question ONLY) the price of Buddz changes to $10+$D, what it the slope of the new budget line?
Table 1 - Ajax's Utility: U = D0.5 * B0.5
|
Buddz
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
0.00
|
3.16
|
4.47
|
5.48
|
6.32
|
7.07
|
7.75
|
8.37
|
8.94
|
9.49
|
10.00
|
|
9
|
0.00
|
3.00
|
4.24
|
5.20
|
6.00
|
6.71
|
7.35
|
7.94
|
8.49
|
9.00
|
9.49
|
|
8
|
0.00
|
2.83
|
4.00
|
4.90
|
5.66
|
6.32
|
6.93
|
7.48
|
8.00
|
8.49
|
8.94
|
|
7
|
0.00
|
2.65
|
3.74
|
4.58
|
5.29
|
5.92
|
6.48
|
7.00
|
7.48
|
7.94
|
8.37
|
|
6
|
0.00
|
2.45
|
3.46
|
4.24
|
4.90
|
5.48
|
6.00
|
6.48
|
6.93
|
7.35
|
7.75
|
|
5
|
0.00
|
2.24
|
3.16
|
3.87
|
4.47
|
5.00
|
5.48
|
5.92
|
6.32
|
6.71
|
7.07
|
|
4
|
0.00
|
2.00
|
2.83
|
3.46
|
4.00
|
4.47
|
4.90
|
5.29
|
5.66
|
6.00
|
6.32
|
|
3
|
0.00
|
1.73
|
2.45
|
3.00
|
3.46
|
3.87
|
4.24
|
4.58
|
4.90
|
5.20
|
5.48
|
|
2
|
0.00
|
1.41
|
2.00
|
2.45
|
2.83
|
3.16
|
3.46
|
3.74
|
4.00
|
4.24
|
4.47
|
|
1
|
0.00
|
1.00
|
1.41
|
1.73
|
2.00
|
2.24
|
2.45
|
2.65
|
2.83
|
3.00
|
3.16
|
|
0
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
0.00
|
|
Drankz
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
List two combinations of Buddz and Dranks that are on the indifference curve U = 6.00 from Table 1 (above).
Combination 1: The combination with the most Drankz?
16. U = 6.00 number of Buddz?
17. U = 6.00 number of Drankz?
Combination 2: The combination with the least Drankz?
18. U=6.00 number of Buddz?
19. U=6.00 number of Drankz?
Suppose Ajax is at the combination (6, 6).
20. What is the marginal utility from getting one more Buddz?
21. What is the marginal utility from getting one more Drankz? What is Ajax's utility maximizing consumption bundle?
22. Umax number of Buddz?
23. Umax number of Drankz?
24. What is Ajax's utility level at his optimal consumption bundle?
Suppose the price of Buddz increases by 20% (for this question ONLY), what is his new optimal consumption bundle?
25. Umax number of Buddz?
26. Umax number of Drankz?
27. What is Ajax's new maximum utility level?
Ajax has a friend Clyde, Clyde has the same budget and faces the prices. Clyde's utility is U = D(Ax10)% ∗ B(1-(Ax10%)).
28. Umax number of Buddz?
29. Umax number of Drankz?
30. What is Ajax's new maximum utility level?