Answers to the Problems and

Applications
1.

Max enjoys
and snorkeling.
shows the total
from each
a. Find Maxs
utility from
at each number of
day.

Hours
per day
1
2
3
4
5
6
7

Total utility
from
windsurfing
120
220
300
360
396
412
422

Total utility
from
snorkeling
40
76
106
128
140
150
158

windsurfing
The table
utility he gets
activity.
marginal
windsurfing
hours per

Maxs marginal
utility from
windsurfing 1
hour per day is
120; from
windsurfing 2
hours per day is 100; from windsurfing 3 hours per day is 80; from
windsurfing 4 hours per day is 60; from windsurfing 5 hours per day is 36;
from windsurfing 6 hours per day is 16; and, from windsurfing 7 hours per
day is 10.

b. Find Maxs marginal utility from snorkeling at each number of hours per
day.
Maxs marginal utility from snorkeling 1 hour per day is 40; from 2 hours per
day is 36; from snorkeling 3 hours per day is 30; from snorkeling 4 hours per
day is 22; from snorkeling 5 hours per day is 12; from snorkeling 6 hours per
day is 10; and, from snorkeling 7 hours per day is 8.

c. Do Maxs marginal utility from windsurfing and from snorkeling obey

the principle of diminishing marginal utility?
Maxs marginal utility from windsurfing and from snorkeling both obey the
principle of diminishing marginal utility because both decrease as the
consumption increases.

d. Which does Max enjoy more: his 6th hour of windsurfing or his 6th hour
of snorkeling?
Maxs marginal utility from his 6th hour of windsurfing is 16 and his marginal
utility from his 6th hour of snorkeling is 10. Max enjoys his 6th hour of
windsurfing more than his 6th hour of snorkeling.

2.

Max in problem 1 has $35 a day to spend, and he can spend as much
time as he likes on his leisure pursuits. Windsurfing equipment rents for
$10 an hour, and snorkeling equipment rents for $5 an hour.
a. Make a table that
Marginal
Marginal
shows the various
utility per
utility per
combinations of hours
Hours
dollar
Hours
dollar
spent windsurfing and
windsurfin
from
snorkelin
from
snorkeling that Max
g
windsurfin
g
snorkelin
can afford.
g
g
The table is to the right.
3
8.0
1
8.0
b. In your table, add
2
10.0
3
6.0
two columns and
1
12.0
5
2.4
list Maxs marginal
0
7
1.6
utility per dollar
from windsurfing and from snorkeling.
The columns are in the table.

c. How long does Max spend windsurfing and how long does he spend
snorkeling to maximize his total utility?
To maximize his utility, Max windsurfs for 3 hours and snorkels for 1 hour.
Max uses his $35 so that all of the $35 is spent and so that the marginal
utility per dollar from each activity is the same. When Max windsurfs for 3
hours and snorkels for 1 hour, he spends $30 renting the windsurfing
equipment and $5 renting the snorkeling equipmenta total of $35.
The marginal utility from the third hour of windsurfing is 80 and the rent of
the windsurfing equipment is $10 an hour, so the marginal utility per dollar
from windsurfing is 8. The marginal utility from the first hour of snorkeling is
40 and the rent of the snorkeling equipment is $5 an hour, so the marginal
utility per dollar from snorkeling is 8. The marginal utility per dollar from
windsurfing equals the marginal utility per dollar from snorkeling.

d. If compared to c, Max spent a dollar more on windsurfing and a dollar

less on snorkeling, by how much would his total utility change?
If Max windsurfs another hour, he pays $10 and gains 60 units of utility (the
marginal utility from the 4th hour), which is 6.0 units of utility per dollar. So
if he spends a dollar more on windsurfing, his utility from windsurfing
increases by 6.0. If he spends an hour less on snorkeling, he saves $5 and
loses 40 units of utility (the marginal utility from the 1st hour of snorkeling),
which is 8.0 units of utility per dollar. So if he spends a dollar less on
snorkeling, he loses 8.0 units of utility. Overall, spending a dollar more on
windsurfing and a dollar less on snorkeling lowers Maxs total utility by 2.0
units of utility.

e. If compared to c, Max spent a dollar less on windsurfing and a dollar

more on snorkeling, by how much would his total utility change?
If Max snorkels another hour, he pays $5 and gains 36 units of utility (the
marginal utility from the 2nd hour), which is 7.2 units of utility per dollar. So
if he spends a dollar more on snorkeling, his utility from snorkeling increases
by 7.2. If he spends an hour less on windsurfing, he saves $10 and loses 80
units of utility (the marginal utility from the 3rd hour of windsurfing), which
is 8.0 units of utility per dollar. So if he spends a dollar less on windsurfing,
he loses 8.0 units of utility. Overall, spending a dollar more on snorkeling
and a dollar less on windsurfing lowers Maxs total utility by 0.8 units of
utility.

f.

Explain why, if Max equalized the marginal utility per hour from
windsurfing and from snorkeling, he would not maximize his utility.
Snorkeling costs half as much per hour as does windsurfing. If Max equalized
the marginal utility from windsurfing and snorkeling the marginal utility per
dollar from snorkeling would be twice that from windsurfing. Max can
therefore increase his utility by spending less on windsurfing and more on
snorkeling. For example, by decreasing his expenditure on windsurfing by a
dollar Max loses utility but by spending that dollar on snorkeling Max gains
almost twice the amount of utility he lost.

3.

Max in problems 1 and 2 is offered a special deal on windsurfing

equipment: a rental rate of $5 an hour. His income remains at $35 a day
and the rental price of snorkeling equipment remains at $5 an hour.
a. Make a table that
Marginal
Marginal
shows the new
utility per
utility per
combinations of hours
Hours
dollar
Hours
dollar
spent windsurfing and
windsurfin
from
snorkelin
from
snorkeling that Max
g
windsurfin
g
snorkelin
can afford.
g
g
The table is to the right.
7
2.0
0
b. In your table, list
6
3.2
1
8.0
Maxs marginal
5
7.2
2
7.2
utility per dollar
4
12.0
3
6.0
from windsurfing
3
16.0
4
4.4
and snorkeling.
2
20.0
5
2.4
The columns are
1
24.0
6
2.0
added in the table
0
7
1.6
to the right.

c. How many hours does Max now spend windsurfing and how many
hours does he spend snorkeling?
Max will now maximize his total utility by spending 5 hours windsurfing and
2 hours snorkeling. This combination of windsurfing and snorkeling uses all
of Maxs income and sets the marginal utility per dollar from windsurfing
equal to the marginal utility per dollar from snorkeling.

4.

Given the information about Max in problems 1, 2, and 3,

a. Find two points on Maxs demand curve for rented windsurfing
equipment.
From problem 2 part c, when the price of renting windsurfing equipment is
$10 per hour, Max rents windsurfing equipment for 3 hours. From problem 3
part c, when the price of renting windsurfing equipment is $5 per hour, Max
rents windsurfing equipment for 5 hours.

b. Draw Maxs demand curve for rented windsurfing equipment.

The demand curve is in Figure 8.1.

c. Is Maxs demand for renting

windsurfing equipment elastic or
inelastic?
Maxs elasticity of demand for renting
windsurfing equipment is inelastic
because a fall in the price decreases
Maxs total expenditure on renting
windsurfing equipment.

5.

Max, with the utility schedules in problem 1, gets an increase in income

from $35 to $55 a day. Windsurfing equipment rents for $10 an hour,
and snorkeling equipment rents for $5 an hour. Show the effect of the
increase in Maxs income on Maxs demand curve for
a. Rented windsurfing equipment, and explain whether, for Max,
windsurfing equipment is a normal good or an inferior good.
To maximize his utility, Max windsurfs for 4 hours and snorkels for 3 hours.
Max uses his $55 such that all of the
$55 is spent and marginal utility per
dollar for each activity is the same.
When Max windsurfs for 4 hours and
snorkels for 3 hours, he spends $40
renting the windsurfing equipment and
$15 renting the snorkeling equipment
a total of $55. The marginal utility from
the fourth hour of windsurfing is 60 and
the rent of the windsurfing equipment
is $10 an hour, so the marginal utility
per dollar from windsurfing is 6. The
marginal utility from the third hour of
snorkeling is 30 and the rent of the
snorkeling equipment is $5 an hour, so
the marginal utility per dollar from
snorkeling is 6. The marginal utility per
dollar from windsurfing equals the
marginal utility per dollar from
snorkeling.
Maxs demand for rented windsurfing equipment increases. The quantity of
windsurfing equipment rented at a price of $10 per hour increases from 3
hours (problem 2c) to 4 hours (this problem). As a result Maxs demand
curve for rented windsurfing equipment shifts rightward as illustrated in
Figure 8.2 (on the previous page) by the shift from D1 to D2. Windsurfing
equipment is a normal good.

b. Rented snorkeling equipment, and explain whether, for Max, snorkeling

equipment is a normal good or an inferior good.
Maxs demand for rented snorkeling
equipment increases. The quantity of
snorkeling equipment demanded at a
price of $5 per hour increases from 1
hour (problem 2c ) to 3 hours (this
problem). As a result Maxs demand
curve for rented snorkeling equipment
shifts rightward as illustrated in Figure
8.3 by the shift from D1 to D2.
Snorkeling equipment is a normal
good.

6.

Schools Get a Lesson in Lunch Line

Economics
Sharp rises in the cost of milk, grain,
and fresh fruits and vegetables are
hitting cafeterias across the country,
forcing cash-strapped schools to raise
prices or pinch pennies by serving
more economical dishes. Fairfax schools, for instance, serve oranges
14 cents eachinstead of grapes, which are a quarter a serving.
The Washington Post, April 14, 2008
Assume that a Fairfax school has a $14 daily fruit budget.
a. How many oranges a day can the school afford to serve if it serves no
grapes?
If the school serves no grapes, it can afford to serve 100 oranges.

b. How many servings of grapes can the school afford each day if it
serves no oranges?
If the school serves no oranges, it can afford to serve to serve 56 servings of
grapes.

c. If the school provides 50 oranges a day and maximizes utility, how

many servings of grapes does it provide?
If the school maximizes utility, it will spend all of its budget. If the school is
providing 50 oranges, it is spending $7 on oranges, leaving it $7 to spend on
grapes. With $7 to spend on grapes, the school buys 28 servings of grapes.

d. If the marginal utility from an orange is 14 units of utility, what is the

marginal utility from a serving of grapes?
The (MUO/PO) = (MUG/PG). Rearranging gives (MUO/PO) PG = MUG, so (14
units of utility/14 cents) 25 cents = MUG, so the marginal utility of a
serving of grapes is 25 units of utility.

7.

Can Money Buy Happiness?

Whoever said money cant buy happiness isnt spending it right.... You
know that there must be some connection between money and
happiness. If there werent, youd be less likely to stay late at work (or
even come in at all). Once you get basic human needs met, a lot
more money doesnt make a lot more happiness. Going from earning
less than $20,000 a year to making more than $50,000 makes you twice
as likely to be happy, yet the payoff for then surpassing $90,000 is
slight.
CNN, July 18, 2006
a. What does the fundamental assumption of marginal utility theory
suggest about the connection between money and happiness?
Marginal utility theory assumes that total utility increases with increases in
the consumption of a good or service, so a persons total happiness (that is,
their total utility) is assumed to increase with income (so that their
consumption increases).

b. Explain why this article is consistent with marginal utility theory.

Marginal utility theory assumes that total utility increases with increases in
the consumption of a good or service but marginal utility decreases with
increases in the consumption of a good or service. Hence a persons total
happiness increases when income increases but the marginal happiness
(that is, the change in total happiness) decreases when income increases.
These results are precisely what the story reports: Total happiness increases
as income increases from $20,000 to $50,000 to $90,000 but the change in
happiness diminishes.

8.

Eating Away the Innings in Baseballs Cheap Seats

Baseball and gluttony, two of Americas favorite pastimes, are merging
in a controversial trend taking hold at Major League Baseball stadiums
across the nation: all-you-can-eat seats. Some fans try to set
personal records during their first game in the section. By their second
or third time in such seats they eat like they normally would at a
game.
USA Today, March 6, 2008
a. What conflict might exist between utility maximization and setting
personal records for eating?
Utility maximization means that the person will eat until the marginal utility
per dollar of food equals the marginal utility per dollar of all other goods and
services. Setting a personal record, however, implies that the persons
objective is to eat until he or she has eaten more than at past events and
not to maximize his or her utility.

b. What does the fact that fans eat less at subsequent games indicate
about what happens to the marginal utility from ballpark food as the
quantity consumed increases?
The fact they eat less implies that the marginal utility from ballpark food
decreases as more is consumed.

c. How can setting personal records for eating be reconciled with

marginal utility theory?
The marginal utility of food consumption includes not only the usual utility
from food but also the utility from setting a food-eating record.

d. Which ideas of behavioral economics are consistent with the

information in the news clip?
Bounded willpower seems very consistent with the information. Undoubtedly
the people who set personal records in the stadium regret their decisions
at later dates when they either have less income to spend than they desire
and/or need to lose weight.

9.

Compared to Other Liquids, Gasoline is Cheap

Think a $4 gallon of gas is expensive? Consider the prices of these other
fluids that people buy every day without complaint
Gatorade, 20 oz @ $1.59 = $10.17 per gallon
Wite-Out, 7 oz @ $1.39 = $25.42 per gallon
HP Ink Cartridge, 16 ml $18 = $4,294.58 per gallon
The New York Times, May 27, 2008
a. What does marginal utility theory predict about the marginal utility per
dollar from gasoline, Gatorade, Wite-Out, and printer ink?
Marginal utility theory predicts that the marginal utility per dollar of each of
these liquids is the same.

b. What do the prices per gallon reported in this news clip tell you about
the marginal utility from a gallon of gasoline, Gatorade, Wite-Out, and
printer ink?
Marginal utility theory concludes that the higher the price, the higher the
marginal utility. Thus the marginal utility of a gallon of gasoline is less than
the marginal utility of gallon of Gatorade, which is less than the marginal
utility of a gallon of Wite-Out, which, in turn, is less than the marginal utility
of a gallon of HP ink.

c. What do the prices per unit reported in this news clip tell you about the
marginal utility from a gallon of gasoline, a 20 oz bottle of Gatorade, a
7 oz bottle of Wite-Out, and a cartridge of printer ink?
Marginal utility theory concludes that the higher the price, the higher the
marginal utility. Thus the marginal utility of 7 oz. of Wite-Out is less than the
marginal utility of 20 oz. of Gatorade, which is less than the marginal utility
of a gallon of gasoline, which, in turn, is less than the marginal utility of an
HP Ink Cartridge.

d. How can the paradox of value be used to explain why the fluids listed
in the news clip might be less valuable than gasoline, yet far more
expensive.
Gasoline presumably is more valuable than Gatorade, Wite-Out, or HP Ink
Cartridges because gasoline is really essential to our modern life. But
gasoline is much more common than these other three products. As a result
the marginal utility and hence the price of gasoline per gallon is less than
that of the other products even though the consumer surplus from gasoline
vastly exceeds that from the other products.

10.

Exclusive Status: Its in The Bag; $52,500 Purses. 24 Worldwide. 1 in

Washington.
Forget your Coach purse. Put away your Kate Spade. Even Hermess
famous Birkin bag seems positively discount. The Louis Vuitton Tribute
Patchwork is this summers ultimate status bag, ringing in at $52,500.
And it is arriving in Washington. ... The company ... [is] offering only five
for sale in North America and 24 worldwide....
The Washington Post, August 21, 2007

a. Use marginal utility theory to explain the facts reported in the news
clip.
The number of purses is extremely limited, so the marginal utility from these
purses will be very high. When the potential consumers equate the marginal
utility per dollar from this purse to the rest of the goods and services they
buy, the price of the purse will be extremely high due to the very high
marginal utility.

b. If Louis Vuitton offered 500 Tribute Patchwork bags in North America

and 2,400 worldwide, what do you predict would happen to the price
that buyers would be willing to pay and what would happen to the
consumer surplus?
If Louise Vuitton increased the number of these purses, the marginal utility
from the purse would fall and the price would fall. Assuming that the
demand for the purse did not change, the consumer surplus from the purse
would increase.

c. If the Tribute Patchwork bag is copied and thousands are sold illegally,
what do you predict would happen to the price that buyers would be
willing to pay for a genuine bag and what would happen to the
consumer surplus?
The marginal utility and the demand for the purse decrease because the
counterfeits are substitutes for the real article. As a result the price buyers
are willing to pay for the genuine bag falls. The presence of the counterfeits
increases the number of substitutes for the real item and the demand
becomes more elastic. If the supply is perfectly inelastic, then the decrease
in demand combined with the increased elasticity of demand means that the
consumer surplus decreases.