Question

Andrew presents you with his utility schedule below.Quantity of Notebooks Utility from notebooks Quantity of CD's Utility from CDs0 0 0 02 70 1 804 130 2 1506 180 3 2108 220 4 26010 250 5 300He informs you that CDs are $6 each and MP3s are $3 each. Andrew doesn't want to spend more than $18 total on both CDs and MP3s. Andrew wants to know what consumption bundle he should choose if he wants to maximize his utility. Enter the quantities of CDs and MP3s he can bundle to maximize his utility.

Answer 1

Answer:

2 CD and 2 MP3 will provide the maximum utility: 220 units

Explanation:

MP3 Q Utility  Marginal Utility  CD Q   Utility    Marginal Utility

     2        70          70                  1        80                80

     4       130         60                  2       150               70

     6       180         50                  3       210               60

     8      220         40                  4      260               50

    10     250          30                  5      300              40

Andrew can Purchase up to 18 dollars

Cost of a CD: 6 dollars

MP3 cost: 3 dollars

He will look at the marginal utlity (utility from additional unit) at the moment of make a desition:

The first CD will provide more utility than 2 MPE (80 to 70)

Then, Andrew will purchase his first pair of MP3 to get 70 more utility for 6 dollars

and then, between the second of each will prefer CD against as the marginal utility is higher: 70 against 60

Andrew will spend all of his budget $12 on CD's and $6 on MP3

Total utility: 80 + 70 + 70 = 220 Utility