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ECON Chapter 6 Assignment

The document provides information about three economics problems involving budget constraints and utility maximization: 1) It calculates the marginal utility schedule for Cookie Monster's consumption of cookies and graphs total and marginal utility, finding Cookie Monster would eat 6 cookies as the marginal utility of the 7th cookie is 0. 2) It sketches the budget constraint for a household with income of $500 that can spend on goods X and Y, finding they would spend equally on both if splitting income. 3) It presents a budget constraint for roommates Jake and Gonzalo's $360 entertainment budget and calculates prices and constraints for amusement park and baseball tickets before and after a price change.

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1K views6 pages

ECON Chapter 6 Assignment

The document provides information about three economics problems involving budget constraints and utility maximization: 1) It calculates the marginal utility schedule for Cookie Monster's consumption of cookies and graphs total and marginal utility, finding Cookie Monster would eat 6 cookies as the marginal utility of the 7th cookie is 0. 2) It sketches the budget constraint for a household with income of $500 that can spend on goods X and Y, finding they would spend equally on both if splitting income. 3) It presents a budget constraint for roommates Jake and Gonzalo's $360 entertainment budget and calculates prices and constraints for amusement park and baseball tickets before and after a price change.

Uploaded by

Dane De Vera
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Problem 1:

The following table gives a hypothetical total utility schedule for the Cookie Monster (CM):

No. of cookies per


Total utility per day
day
0 0
1 100
2 200
3 275
4 325
5 350
6 360
7 360

1. Calculate the CM’s marginal utility schedule.

No. of cookies per Marginal


Total utility per day
day Utility
0 0
1 100 100
2 200 100
3 275 75
4 325 50
5 350 25
6 360 10
7 360 0
2. Draw a graph of total and marginal utility.

Graph 1: Total Utility-Y axis, No. of Cookies-X axis

Graph 2: Marginal Utility-Y axis, No. of Cookies-X axis


3. If cookie cost the CM 5 cents each and CM had a good income, what is the
maximum number of cookies he would most likely eat in a day?

The maximum number of cookies that he would most likely to eat in a day is 6 because as
shown in the table if he eats the 7 th cookie his marginal utility will fall to zero, by this it is lower
than the marginal cost of 5cents.

 
Problem No. 2

Suppose the price of X is $5, the price of Y is $10, and hypothetical household has $500 to spend
a month on goods X and Y.

1. Sketch household budget constraint.

x = $500/$5 = 100
y = $500/$10 = 50

2. Assume that the household splits its income equally between X and Y. Show where
the household ends up on the budget constraint.

x = 100/2 = 50
y = 50/2 = 25
3. Suppose the household income doubles to $1,000. Sketch the new budget constraint
facing the household.

x = $1000/$5 = 200
y = $1000/$10 = 100

4. Suppose after the change the household spends $200 on Y and $800 on X. Does this
imply that X is a normal or an inferior good. What about Y?

X is a normal good due to the fact that when its income rises, its demand and
spending for that good also increases. While Y is an inferior good, because as the income
rises, its demand and spending decreases.
Problem No. 3

Jake and Gonzalo are roommates and have saved a total of $360 to spend on summer
entertainment. They have decided to use this money on tickets to baseball games and on tickets
to their local amusement park. Their original budget constraint is shown in the graph below. Let
X represents amusement park tickets and Y represents baseball tickets.

1. What are the equation of the original budget constraint?

30x + 36y = 360

360
Amusement park tickets =30
12
360
Baseball tickets =36
10

2. What is the price of amusement park ticket? Baseball ticket?

The price of the amusement park ticket is $6. While the price of the baseball ticket is $5.

3. Assume a price change occurs and Jake and Gonzalo now face the new budget
constraint. What is the equation of the new budget constraint?

30x + 18y = 360

360
Amusement park tickets =30
12
360
Baseball tickets =18
20

4. With the new budget constraint, what is the price of an amusement park ticket? A
baseball ticket?

The price of the amusement park ticket is $6. While the price of the baseball ticket is $10.

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