Share
Explore BrainMass

Consumer Behavior and Utility Maximization

Can you please answer question 1 (a-c) and question 2 (a-d). The should be approached from an Introductory Microeconomics perspective. The concept dealt with in the exercise is Consumer Behavior and Utility Maximization.

Attachments

Solution Preview

Please refer to the attachment.

1. The table below shows the marginal utility that a consumer would get by consuming various quantities of goods A, B, C and D. The last column gives the Marginal Utility (MU) the consumer gets from saving. Suppose that the prices per unit of goods A, B, C and D are $18, $6, $4 and $24, respectively. The price of a dollar of saving is $1. Assume also that the consumer has is an income of $106 per period.
Column 1 Column 2 Column 3 Column 4 Column 5
Units of A MU Units of B MU Units of C MU Units of D MU $ Saved MU
1 72 1 24 1 15 1 36 1 5
2 54 2 15 2 12 2 30 2 4
3 45 3 12 3 8 3 24 3 3
4 36 4 9 4 7 4 18 4 2
5 27 5 7 5 5 5 13 5 1
6 18 6 5 6 4 6 7 6 0.5
7 15 7 2 7 3.5 7 4 7 0.25
8 12 8 1 8 3 8 2 8 0.125

a. What quantities of goods A, B, C and D will the consumer buy in maximizing his/her total utility?

When the total utility is maximized, the marginal utility over price of each good (saving) should be the same. Otherwise, the consumer will spend more money on the item that gives him higher marginal utility.
Therefore, we will have:
MUa / 18 = MUb / 6 = MUc / 4 = MUd / 24 = MUs / 1
Where "MUs" stands for ...

Solution Summary

Consumer Behavior and Utility Maximization are exemplified.

$2.19