Suppose that as a consumer you have $34 per month to spend for munchies, either on pizzas which cost $6 each or on twinkies which cost $4 each. Suppose further that your preferences are given by the following total utility table.
|TU for Pizza||60||108||138||156||162||166||166|
|TU for Twinkies||44||76||100||120||136||148||152|
First, graph the budget constraint with pizzas on the horizontal axis and twinkies on the vertical axis. What are the intercepts and slope of the opportunity cost? Express the budget constraint as an algebraic equation for a line.
Next, should you purchase a twinkie first or a pizza first to get the “biggest bang for the buck”? How can you tell? (Hint: use the utility maximizing rule.) What should you purchase?
Next, use the utility maximizing rule to identify the consumer equilibrium, that is, what combination of twinkies and pizzas will maximize your total utility. (Hint: What should you purchase second, third, etc. until you exhaust your budget?)
Confirm that the consumer equilibrium generates the highest combined total utility of any affordable combination of goods. E.g., compute the total utility of some other affordable combinations of twinkies & pizzas and compare with the consumer equilibrium.
|Accurately graph the budget constraint, including intercepts and slope||5|
|Express the budget constraint as an algebraic equation for a line||2|
|Identify which product to purchase first and correctly explain why||3|
|Calculate the consumer equilibrium using the utility maximizing rule||4|
|Explain the process used to confirm that the consumer equilibrium generated the highest combined total utility of any affordable combination of goods||4|
|Articulation of response (citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas.)||2|
- Assignment: Maximizing Utility of Pizzas and Twinkies. Provided by: Lumen Learning. License: CC BY: Attribution