Fred is a teenager who like
- Fred is a teenager who likes to listen to musicand to play games on his computer. Suppose that he has an annualentertainment budget of $144 and that each music CD costs $12 andeach computer game costs $24.
QuantityConsumed TotalUtility Total Utility
(peryear) of MusicCDs of Computer Games
0 0 0
1 200 160
2 236 232
3 268 296
4 296 352
5 320 400
6 340 440
7 344 472
- Calculate the marginal utility of each unit of music CDs andcomputer games.
- Using the prices mentioned above, calculate the marginalutility per dollar of music CDs and computer games. Round to twodecimal places.
- What much of each good will Fred purchase to maximizesatisfaction? (Find the utility-maximizing combination of music CDsand computer games.)
- What is the total amount of utility that Fred will receive whenhe consumes the combination computed in Part C, i.e. the totalutility from the music CDs plus the total utility from the computergames?
- Given your answer in C, explain why buying two more music CDsand 1 less computer game makes Fred worse off.
Answer:
a). The marginal utility is the addition made to the totalutility when an additional unit of the commodity is consumed. Themarginal utility is calculated by the following formula.
Mu 
.
Change.
b). The marginal utility per dollar is calculated by dividingthe marginal utility of the product of by the respective price.
Marginal utility per dollar 
c). With the given budget the profit maximizing unit is wherethe marginal utility per dollar is equal for both the music Cd’sand computer games, that is where he purchases 4 units of the Cdand 4 computer games.
.
d). Total utility is 
.
e). At this point the marginal utility per dollar would not beequal , so it is not profit maximizing.
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