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QUESTION 5The table below shows the marginal utility of good A, good B and good C for Betty.
Unit of goodsMarginal Utility for good A (MUA)Marginal Utility for good B (MUB)Marginal Utility for good C (MUC)1183912216361031433941230851027768246
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(a) Suppose Betty has RM26 to spend on these three goods. The prices of good A, good B and good C are RM2, RM3 and RM1 respectively. What combination of three goods should be purchased in order to maximise utility?To maximize utility, we use the Utility Maximizing Rule :MUA/ PA= MUB/ PB = MUC/PC
STEP 1 Calculate the MU/P = Marginal Utility per dollar
Price : A = RM2, B = RM3, C = RM1
QAMUAMUA/PAQBMUBMUB/PBQCMUCMUC/PC0--0--0--1189139131121221682361221010314733311399412643010488510552795776846248666
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MUA/ PA= MUB/ PB = MUC/PC
16 utils/RM2 = 24 utils/RM3 = 8 utils/RM1
So betty should purchase 2 units of good A, 6 units of good B and 4 units of good C to maximise her utility.
2PA + 6PB + 4PC = 2(RM2) + 6(RM3) + 4(RM1) = RM26
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What will she buy first?
The first B gives you 13 units of satisfaction per dollar which is more than the first A or C. So buy 1 B
What will she buy next?
The second B and the first C both give 12 units of satisfaction per dollar, so buy them.
What will she buy next? The third B since it gives 11 units of satisfaction per dollar than the others.
What is next?Keep shopping until you have spent all of your money.
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(b) Based on the answer above, what is the total utility derived by Betty?
2 units of good A, 6 units of good B and 4 units of good C
TUA + TUB+ TUC = 34 + 189 + 39
= 262
Conclusion : Betty will get a total of 262 units of satisfaction.
Unit of goodsMUATUAMUBTUBMUCTUC0-0-0-011818393912122163436751022314483310893141260301388395107027165746687824189652