1 Assume that Pericles has 8 to spend on cups of coffee and

1. Assume that Pericles has $8 to spend on cups of coffee and ice cream cones and both goods must be purchased whole (no fractional units). A cup of coffee costs $0.5 each and an ice cream cone costs $1 each. Pericles’s preferences are summarized by the following information:

Number of ice cream cones

TU

MU

MU/$

1

20

2

36

3

50

4

62

5

72

6

80

7

86

Number of

Cups of coffee

TU

MU

MU/$

1

12

2

22

3

31

4

39

5

45

6

49

7

52

(a)Fill in the figures for marginal utility and marginal utility per dollar for both ice cream cones and cups of coffee.

(b) Given the budget of $8 what quantity of ice cream cones and what quantity of cups of coffee will maximize Pericles’s utility? Explain.

Number of ice cream cones	TU	MU	MU/$
1	20
2	36
3	50
4	62
5	72
6	80
7	86
Number of Cups of coffee	TU	MU	MU/$
1	12
2	22
3	31
4	39
5	45
6	49
7	52

Solution

Number of Total Marginal MU /$ Ice cream Utility Utility 1 20 20 20 2 36 16 16 3 50 14 14 4 62 12 12 5 72 10 10 6 80 8 8 7 86 6 6 Number of Total Marginal MU /$ Coffee Utility Utility 1 12 12 24 2 22 10 20 3 31 9 18 4 39 8 16 5 45 6 12 6 49 4 8 7 52 3 6 As per budget of $8. The Number of Icecream to be bought is 5 units The number of Coffee to be bought is 6 units As the consumption is made of the unit give highest MU/$, the same is computed with maximum budget