QUESTION 1 - Columns 1 through 4 in the accompanying table show the marginal utility, measured in utils, that Joe would get by purchasing various amounts of products A, B, C, and D. Column 5 shows the marginal utility Joe gets from saving. Assume that the price of good A is $18.00, the price of good B is $6.00, the price of good C is $4.00 and the price of good D is $12.00. Joe's income is $142.00.
a. What quantities of A, B, C, and D will Joe purchase in maximizing his utility?
b. How many dollars will Joe choose to save?
c. Check your answers by substituting them into the algebraic statement of the utility-maximizing rule.
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Column 1
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Column 2
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Column 3
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Column 4
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Column 5
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|
Units of Good A
|
MU
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Units of Good B
|
MU
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Units of Good C
|
MU
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Units of Good D
|
MU
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Number of Dollars Saved
|
MU
|
|
1
|
72
|
1
|
24
|
1
|
15
|
1
|
36
|
1
|
5.00
|
|
2
|
54
|
2
|
15
|
2
|
12
|
2
|
30
|
2
|
4.00
|
|
3
|
45
|
3
|
12
|
3
|
8
|
3
|
24
|
3
|
3.00
|
|
4
|
36
|
4
|
9
|
4
|
7
|
4
|
18
|
4
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2.00
|
|
5
|
27
|
5
|
7
|
5
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5
|
5
|
13
|
5
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1.00
|
|
6
|
18
|
6
|
5
|
6
|
4
|
6
|
7
|
6
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0.50
|
|
7
|
15
|
7
|
2
|
7
|
3.5
|
7
|
4
|
7
|
0.25
|
|
8
|
12
|
8
|
1
|
8
|
3
|
8
|
2
|
8
|
0.13
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QUESTION 2 - Using the figure below, answer the following three questions:
a. Explain why the point of tangency of the budget line with an indifference curve is the consumer's equilibrium position.
b. Explain why any point where the budget line intersects an indifference curve will not be equilibrium.
c. Explain the following statement: "The consumer is in equilibrium where MRS = PB/PA."