Microeconomics Help

May 2010
5
0
Question 1
If the prices of A, B, and C are $2, $3, and $1, and the consumer has $26 to spend on these three products, what combination of the three products should be purchased in order to maximize utility?





Question 2
Fill in the following table for a product in a purely competitive market. The market price for the good is at $32. Use the revenue-total cost approach to evaluate at what quantity the firm can maximize its profits.
 
May 2010
1,034
272
Albert,

Question1
Your aim is to get the most utility for every $1 you spend.

At each step, work out the marginal utility you get per $1 spent on each product. Consumer will choose the one that has the highest figure (provided he has enough money left to afford it)

So, to start with you have:
(A) 18/2 =9
(B) 39/3 = 13
(C) 12/1 = 12

So the highest utility per $ comes from B, and he buys one of those.


Now he has $24 and has to decide what to buy next:
(A) 18/2 =9
(B) 36/3 = 12
(C) 12/1 = 12

He is tied between B and C. You can choose which one he will buy (ill pick B again)



Now he has $22 and has to decide what to buy next
(A) 18/2 =9
(B) 33/3 = 11
(C) 12/1 = 12
The best value is (C), so he buys one of them


Now he has $21 and has to decide what to buy next.....


You dont need to do this full reasoning every time (although you can if you want). It will be quicker for you to produce a full table of (Marginal Utility / Price).


Question 2
You have already worked out the total cost, so you just need the total revenue.

This is: (sale price) * (total product output).

You didn't give the sale price but from your screenshot it looks like it might be $32.

Profits are:
(total revenue) - (total cost)

Once you have worked out the profit at every output level, just see which output level has the highest profit.
 
May 2010
5
0
Thanks a lot for the help. Now can you please help me with this and answer it fully, I hve a test on this question in 10 minutes!

Question :
Meaning well, your grandmother gives you a new wool sweater for your birthday that she knitted herself. You, however, hate wearing wool. What is the utility problem that you face? What can you do to remedy the problem?