In this assignment you will apply consumer choice theory and marginal analysis t
ID: 1167593 • Letter: I
Question
In this assignment you will apply consumer choice theory and marginal analysis to business problems.
Consider each of the following products and services:
a pair of tickets to a sporting or cultural event that you enjoy
a can of common table salt
a college class
In a two-page essay:
Explain how your own current household budget, tastes and preferences, and future expectations determine how much of each of these products you purchase in a year. Describe the benefits (utility) you get from each product and service.
Suppose the price of the tickets were cut in half. How would your consumption of cultural or sporting goods change? Why?
Suppose your household budget was suddenly doubled because you received a 100% raise. How would your consumption of each of these goods and services change? Explain your answer in terms of utility and marginal analysis.
What is the law of diminishing marginal utility? How does this law affect the ability of table salt companies to stimulate demand for their product?
Explanation / Answer
A consumer spends his income on purchase of various goods in ceratin quantities. Thus his full income is his budget out of which he can not spend.
Lets I be the income of the consumer that he earned in a year which is also his budget for the year.
Let Pt , Ps , Pc are the price of one pair of tickets, one can of salt and one class respectively. And t, s and c be units of pair of tickets, can of salt and classes respectively.
THus according to budget constraint condition we have,
I = tPt + sPs + cPc
The above budget constraint that is income will influence the decision to purchase how many units of each products.
The product/goood having maximum taste and preference will be given more worth of dollar and hence would be purchase more relatively to others. For example if the onsumer preferred classes more than the tickets and cans of salt, although of having high prices he will substantially ourchase more of the units of classes in relative to ddollar worth spend on it and on other goods.
The good having higher value expectations from others will have more prefernce and will have the consumer to spend relatively more on that good.
The utility derived from purchasing pair of ticket would be recreational where the consmuer may relax by enjoying with his spouse/friend etc.
A can of common salt table would proide the utility of enhanced taste in food that would increase the satisfaction derived from food.
Classes would help the consmuer to get something learned to get a degree/certificate that may help him to get a good job in future.
If the price of tickets get down 50% it would create substitution and income effect. Substitution effect will result as the cosnumer will not get more of the tickets and income would be increased in real terms because of reduction in price. This will make the consumer better off.
If the household budget gets doubled that is income gets doubled by 100% raise in price, a new equilibrium that coul dbe derved by equating mu of all goods will be derived.
MUt = MUs = MUc
if the income increases the units consumption of ecah good will alos gets double that will give same equilibrium as given above.
According to diminishing marginal utility, as a consumer consumer successive units of a good the utility derived from each unit consmuption gets decrease.