Problem 1: Total Utility vs. Marginal Utility and Demand Curve

As school increasingly stresses you out, you decide to take a couple of days off and to head for the beach for a real sun and fun deal. You decide to buy some new outfits for the beach

(B)and some elegant clothes (E) for the nightlife.

Qty.

Beach Wear (B)

Elegant Wear (E)

Total Utility (B)

Marginal Utility (B)

MU(B)

PB

Total Utility (E)

Marginal Utility (E)

MU(E)

PE

1

250

350

2

450

550

3

600

700

4

700

800

5

775

875

6

800

900

a.) Draw the total and marginal utility functions for B and E.

b.) If you have a budget of USD 160 and an item of each beach and elegant wear costs USD 20, how many items of beachwear and elegant wear will you buy? Why would you not buy five items of elegant wear and three items of beachwear? How big is your consumer surplus for beach and elegant wear, respectively?

c.) If you have a budget of USD 160 and an item of beachwear costs USD 20 and an item of elegant wear costs USD 40, how many items of beachwear and how many items of elegant wear would you buy? Why would you not buy three items of elegant wear and two items of beachwear? How big is your consumer surplus for beach and elegant wear, respectively?

d.) Locate the price-demand combination for elegant wear in a diagram. Estimate the shape of the demand curve for elegant wear for all prices.

e.) Now assume that you and two of your best friends, who have exactly the same budget and preferences as you, join you to the beach. Locate the combined price- demand combinations of you three for elegant wear in a diagram. Estimate the shape of the aggregate demand curve for elegant wear for all prices. Sketch the area that represents consumer surplus.

Problem 1: Total Utility versus Marginal Utility and Demand Curve (Contd.)

a:

d and e:

44

33

22

11

123456Q

369121518 Q

The numbers on the y-Axis are in 100s