Scenario 3.1:
Andy derives utility from two goods, potato chips (Qp) and Cola (Qc). Andy receives zero utility unless he consumes some of at least one good. The marginal utility that he receives from the two goods is given as follows:

-Refer to Scenario 3.1. If the price of potato chips is $0.50 and the price of Cola is $4.00, and Andy has an unlimited income, how many units of potato chips will he consume?
A) 5
B) 6
C) 7
D) 8
E) none of the above

Question

Scenario 3.1:
Andy derives utility from two goods, potato chips (Qp) and Cola (Qc). Andy receives zero utility unless he consumes some of at least one good. The marginal utility that he receives from the two goods is given as follows:
 
-Refer to Scenario 3.1. If the price of potato chips is $0.50 and the price of Cola is $4.00, and Andy has an unlimited income, how many units of potato chips will he consume?
A) 5 
B) 6 
C) 7 
D) 8 
E) none of the above

Quizplus · Accepted Answer

To maximize his utility, Andy should consume the goods until the point where the ratio of the marginal utility to the price is equal for both goods. This means that:

MU of potato chips / price of potato chips = MU of Cola / price of Cola

Plugging in the given marginal utilities and prices, we get:

(6 / 0.5) = (18 / 4)

12 = 4.5

This is not true, so Andy should not consume an equal amount of both goods. Instead, he should consume more potato chips, as they have a higher marginal utility per dollar spent. To find the optimal consumption of potato chips, we can use the marginal utility of the last unit consumed of each good:

MU of last potato chip = 6
MU of last Cola = 2

Since the price of potato chips is $0.50, which is less than the marginal utility of the last unit consumed, Andy should consume more potato chips. We know that Andy will not stop consuming potato chips until the marginal utility falls below $0.50. So, Andy will consume potato chips until the point where the marginal utility of potato chips is equal to $0.50, which occurs at 6 units. Therefore, the answer is B) 6 units of potato chips.

Scenario 3.1: Andy Derives Utility from Two Goods, Potato Chips (Qp) and (Qp)