Mary consumers both bagels and toy cars Quantity of Marginal UtilityQuantity of
ID: 1107461 • Letter: M
Question
Mary consumers both bagels and toy cars Quantity of Marginal UtilityQuantity of Marginal Utility from Toy Cars (utils) 10 Bagelsfrom Bagels (utils) Toy Cars 2 6 a. Based on the table above: what's Mary's total utility from purchasing 5 toy cars? b. If her weekly income is $20, the price of bagel is S2, and the price of a toy car is $1. What quantity of bagels and toy cars will maximize Mary's utility if she spends her entire weekly income on bagels and toy cars? c. If the price of wheat increases, will Mary's demand for bagels increase, decrease, or not change? Explain. d. Suppose her income elasticity for bagels is -0.2. Does the value of Mary's income elasticity indicate that bagels are normal goods, inferior goods, substitutes, or complements? Explain. e. Suppose that when the price of toy cars increases by 10%. Mary buys 5% fewer toy cars and 4% less of a different toy, block. Calculate the cross-price elasticity for toy cars and blocks and indicate is it is positive or negative.Explanation / Answer
Answer (a) - According to the given Mary's utility table, Mary's total utility for toy cars is the sum of marginal utilities from individual units.
TU = MU1 + MU2 ......MU6
TU = 10 + 8 + 6 + 4 + 3 + 2
TU = 33 utils
(b) If weekly income is $20, price of bagel is $2 and price of toy car is $1. Mary will try to get maximum utility from bundle of two goods. If Mary spends all her income on Bagels then she can purchase all six units by spending $12 only. Her TU will be,
TU = 8+7+6+5+4+3
TU = 33 utils
If she spends all her income on toy cars then she can get TU = 10+8+6+4+3+2
TU = 33 utils
(c) Price of wheat increased which is used as raw material for Bagels. Thus price of Bagels will increased and Law of demand will take place. Law of demand establishes an inverse relation between quantity demanded and price. So if price of Bagels go up then Mary's demand for bagels would decrease.
(d) Suppose her income elasticity for bagels is -0.2. Income elasticity is negative it means quantity demanded decreases if income increases so, Bagels is a 'Inferior good'
(e) When the price of toy cars increase 10% then Mary buys 5% fewer toy cars and 4% less of a different toy.
Cross price elasticity = % change in quantity in one good / % change in price of other good
Cross price elasticity = 4 / 10
Cross price elasticity = - 0.4
These goods are complementary good for which cross price elasticity is calculated.