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Chapter 6: Problem 2

[Uses the Marginal Utility Approach] Now go back to the original assumptions of problem 1 (novels cost \(\$ 8,\) CDs cost \(\$ 6,\) and income is \(\$ 120\) ). Suppose that Parvez is spending \(\$ 120\) monthly on paperback novels and used CDs. For novels, \(M U / P=5 ;\) for CDs, \(M U / P=4 .\) Is he maximizing his utility? If not, should he consume (1) more novels and fewer CDs or (2) more CDs and fewer novels? Explain briefly.

Short Answer

Expert verified
No, Parvez is not maximizing his utility. He should consume more novels and fewer CDs to maximize his utility.

Step by step solution

01

Understand Marginal Utility to Price Ratio

The MU (Marginal Utility) to P (Price) index is a representation of the additional satisfaction compared to the cost of one more unit of a good. It's calculated by dividing the Marginal Utility of the good by its Price. Good allocation of resources follows the rule of equating the MU/P for all goods.
02

Evaluate Marginal Utilities to Price Ratios

We know that for novels, the MU/P ratio is 5 and for CDs, the MU/P ratio is 4. In a well-allocated resource scheme, these values should be equal.
03

Comparison and Conclusion

Comparing the calculated MU/P ratios, the MU/P for novels is greater than MU/P ratio for the CDs. This implies that consuming another novel provides more utility compared to its cost than an additional CD. This concludes that Parvez is not maximizing his utility.
04

Recommendation

As the MU/P ratio for novels is greater than the MU/P for CDs, to maximize utility, Parvez should consume more novels and fewer CDs till the MU/P ratio for both the goods turn out to be equal.

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Most popular questions from this chapter

When an economy is experiencing inflation, the prices of most goods and services are rising but at different rates. Imagine a simpler inflationary situation in which all prices, and all wages and incomes, are rising at the same rate, say 5 percent per year. What would happen to consumer choices in such a situation? (Hint: Think about what would happen to the budget line.)

Three people have the following individual demand schedules for Count Chocula cereal that show how many boxes each would purchase monthly at different prices: $$\begin{array}{lccc} \text { Price } & \text { Person 1 } & \text { Person 2 } & \text { Person 3 } \\\ \hline \$ 5.00 & 0 & 1 & 2 \\ \$ 4.50 & 0 & 2 & 3 \\ \$ 4.00 & 0 & 3 & 4 \\ \$ 3.50 & 1 & 3 & 5 \end{array}$$ a. What is the market demand schedule for this cereal? (Assume that these three people are the only buyers.) Draw the market demand curve. b. Why might the three people have different demand schedules?

Suppose that 1,000 people in a market each have the same monthly demand curve for bottled water, given by the equation \(Q^{D}=100-25 P\), where \(P\) is the price for a 12 -ounce bottle in dollars. a. How many bottles would be demanded in the entire market if the price is \(\$ 1 ?\) b. How many bottles would be demanded in the entire market if the price is \(\$ 2 ?\) c. Provide an equation for the market demand curve, showing how the market quantity demanded by all 1,000 consumers depends on the price.

"If a good is inferior, a rise in its price will cause people to buy more of it, thus violating the law of demand." True or false? Explain.

Which of the following descriptions of consumer behavior violates the assumption of rational preferences? Explain briefly. a. Joseph is confused: He doesn't know whether he'd prefer to take a job now or go to college full-time. b. Brenda likes mustard on her pasta, in spite of the fact that pasta is not meant to be eaten with mustard. c. Brewster says, "I'd rather see an action movie than a romantic comedy, and I'd rather see a romantic comedy than a foreign film. But given the choice, I think I'd rather see a foreign film than an action movie."
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