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Cookie Monster - Use the chart below shows the utility that Cookie Monster gets from consuming two goods to answer the following questions. Fill in the chart to show Cookie Monster’s marginal utility.
1. If Cookie is only consuming cookies, how much should he consume?
2. If the price of milk is $3 and the price of cookies is $1 and Cookie has an income of $13, what is the total amount of each good that the consumer would purchase? Show your work.3. Suppose the price of cookies rises to $2. How will this affect the amount of milk and cookies that Cookie purchases? How does this show the Law of Demand?4. Suppose the $2 price increase is the result of a tax that is implemented to encourage people to eat fewer cookies, and therefore reduce obesity. Has the tax had its desired effect? What is the name for this type of tax?
4. There is a $1 tax on this market (that is fully born by the buyer). What affect will this have on amount that each person buys?
3. How much will each person buy in this market?
2. What will be the equilibrium price and quantity in this market?
2. What is his amount of his total utility if he buys these items?
3. After going to the store and making his purchases, Felix finds $2 on the ground. He picks it up and tells you he is going back to the store. He asks you what he should buy with the additional $2. Remember he just bought $9 worth of fruit, but has not yet consumed any of it, which means the additional utility from the new purchases will be added to the utility from his previous purchases.
4. Before he could spend his $2, Felix comes out of the store confused – it seems that the price of apples is now $2. How has this price change altered Felix’s decision about what to purchase? Besides limiting his choices, how does this effect Felix’s overall happiness or utility?
5. As your talking to Felix, Mr. McCourt overhears your conversation with Felix and interrupts. He explains how growing up in Ireland he was lucky to have potato, let alone any of this fancy fruit, and that Felix should get more enjoyment out of his money. Using economic language of utility and terminology to be polite, how can you tell Mr. McCourt to mind his own business?
6. After dealing with Felix and Mr. McCourt, you go into the store to buy some fruit. While you are in there, the manager complains to you that he is not making any money from selling apples anymore because people are not buying them. How would you explain to the manager, using the example of your friend Felix, the effect that the price increase has on apple sales?
Video on an Application of Marginal Utility - click here
Curious George buys bananas for a $ 1 each and coconut juice for 50 cents a carton. Currently, the marginal utility of the banana he buys is 80 utils and the marginal utility for the last carton of coconut juice is 100 utils. Is Curious George buying the utility maximizing combination of bags of bananas and coconut juice? If not, how should he reallocate his expenditures between the two goods? (i.e. buy more or less of each good)?
Pizza places often offer deals where the first pizza is full price (around $10) and the second is half price (around $5). Use the concept of diminishing marginal utility to explain why they would have this policy rather than simply charging a middle price (around $7.50) for all pizzas?
Individual & Market Demand - The chart to the right shows the individual demand curves for three people who buy a good in a market and the supply curve for the market.
1. What is the market demand curve?
Felix - Your friend Felix, after learning about your knowledge in economics, asks if you can help him with some of his consumer purchases. He explains that he likes apples, bananas and oranges. His marginal utility is shown in the chart to the right:
1. He tells you that he knows a great store where fruit all sells for $1. Felix tells you that he only has $9 to spend. How much of each type of fruit should Felix buy to maximize his utility?
5. An improvement in technology shifts the market supply curve. The new supply curve is shown to the right. What is the new equilibrium price and quantity in this market?
6. How much will each person buy in this market?
7. Compare the amount each person bought at the two different prices. Rank the three people in order from the person most responsive to a change in price to least responsive. What does this show you about the elasticity of demand?
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