Suppose that Omar’s marginal utility for cups of coffee is constant at 2.5 utils
ID: 1169145 • Letter: S
Question
Suppose that Omar’s marginal utility for cups of coffee is constant at 2.5 utils per cup no matter how many cups he drinks. On the other hand, his marginal utility per doughnut is 10 for the first doughnut he eats, 9 for the second he eats, 8 for the third he eats, and so on (that is, declining by 1 util per additional doughnut). In addition, suppose that coffee costs $1 per cup, doughnuts cost $1 each, and Omar has a budget that he can spend only on doughnuts, coffee, or both. How big would that budget have to be before he would spend a dollar buying a first cup of coffee?
Instructions: Enter your answer as a whole number.
Explanation / Answer
When MU/Price of goods are equal then consumer receives equal marginal utility per dollar from additional dollar spent on any goods.
MU/Price of coffee is 2.5/1=2.5
MU/price of donut is MU/1=MU.
Till consumer consumes 7 units of donut, he will not buy any coffee as additional utility gain from coffee is less than utility gain from donut. So Omar need at least $7 budget before he would spend a dollar buying a first cup of coffee.