The price of coffee at a local coffee shop is $2.50. Cheryl is willing to pay $8 for her first cup of coffee each day. The marginal benefit to her of each additional cup of coffee falls by $2. How many cups of coffee should Cheryl purchase?

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Quizplus · Accepted Answer

Cheryl's willingness to pay for the first cup is $8, which is greater than the price of $2.50, so she should definitely buy one cup. The marginal benefit of each additional cup decreases by $2, so the second cup is only worth $6 to her. The total benefit of two cups would be $8 + $6 = $14. Choosing a third cup would give her only $4 of additional benefit ($8 + $6 + $4 = $18), so it is not worth paying the full $2.50 price for. Therefore, Cheryl should purchase three cups of coffee.

The Price of Coffee at a Local Coffee Shop Is