Problem Set 3 Question 4 Essay Example

4. What combination of the two goods below allows you to maximize your utility with a budget constraint of $14? Show how you arrived at your conclusion in the space provided below. Place your final answers on the lines at the bottom of this page.

PRICE = $0.50 per pint

|Bottles of glue |Total Utility (Utils) |
|1 |15 |
|2 |23 |
|3 |30 |
|4 |35 |
|5 |38 |
|6 |40.5 |

PRICE = $2.00 per box

|Bales of hay |Total Utility (Utils) |
|1 |10 |
|2 |22 |
|3 |36 |
|4 |52 |
|5 |70 |
|6 |90 |

Bottles of glue: ___4______________________

Bales of hay: _____6_______________________

We need to determine the MU/dollar spent. First, you calculate marginal utilty as shown in the table. Then divide that by the price of each good. After that, look for the place where MU/$ for glue = MU/$ for hay while falling under the $14 budget constraint.

|Bottles of glue |Total Utility (Utils)|MU |MU/P | | |
|1 |15 |15 |30 | | |
|2 |23 |8 |16 | | |
|3 |30 |7 |14 | |