Question

The following table indicates Anna's utility from consuming cups of latte and pieces of pastry. Anna has a budget of 52 dollars and latte and pastry cost 4 dollars each.   Assuming that Anna spends her full budget on lattes and pastries, fill in the table below and answer the questions that follow:

Cups of Latte				Pieces of Pastry
Quantity	Total Utility	Marginal Utility	MU/dollar	Quantity	Total Utility	Marginal Utility	MU/dollar
0	0	0	-	0	0	0	-
1	170	?	?	1	50	?	?
2	260	?	?	2	100	?	?
3	325	?	?	3	135	?	?
4	370	?	?	4	156	?	?
5	395	?	?	5	172	?	?
6	418	?	?	6	182	?	?
7	428	?	?	7	190	?	?
8	432	?	?	8	190	?	?
9	432	?	?	9	180	?	?

Part 1: How many lattes will Anna consume to maximize her utility?    

Part 2: How many pastries will Anna consume to maximize her utility?  

Assume for Parts 3 & 4 that the price of lattes remains at $4 but the price of pastries falls to $2.

Part 3: How many lattes will Anna now consume to maximize her utility?  

Part 4: How many pastries will Anna now consume to maximize her utility?  

Answer 1

Budget = $52

Price of Latte and Pastry = $4 each

Cups of Latte				Pieces of Pastry
Quantity	Total Utility	Marginal	MU/dollar MU/$4	Quantity	Total Utility	Marginal	MU/dollar MU/$4
		Utility				Utility
0	0	0	-	0	0	0	-
1	170	170	42.5	1	50	50	12.5
2	260	90	22.5	2	100	50	12.5
3	325	65	16.25	3	135	35	8.75
4	370	45	11.25	4	156	21	5.25
5	395	25	6.25	5	172	16	4
6	418	23	5.75	6	182	10	2.5
7	428	10	2.5	7	190	8	2
8	432	4	1	8	190	0	0
9	432	0	0	9	180	-10	-2.5

Part 1: How many lattes will Anna consume to maximize her utility?   

Answer – 7 Lattes

Part 2: How many pastries will Anna consume to maximize her utility?

Answer – 6 Pastry

Equilibrium Condition = MU/Dollar of Latte = MU/Dollar of Pastry

At 7 units of Latte and 6 units of Pastry the consumer gets highest utility.

Latte	7 units	4 dollars	$28
Pastry	6 units	4 dollars	$24
Total Expenditure			$52

Assume for Parts 3 & 4 that the price of lattes remains at $4 but the price of pastries falls to $2.

Cups of Latte				Pieces of Pastry
Quantity	Total Utility	Marginal	MU/dollar MU/$4	Quantity	Total Utility	Marginal	MU/dollar MU/$2
		Utility				Utility
0	0	0	-	0	0	0	-
1	170	170	42.5	1	50	50	25
2	260	90	22.5	2	100	50	25
3	325	65	16.25	3	135	35	17.5
4	370	45	11.25	4	156	21	10.5
5	395	25	6.25	5	172	16	8
6	418	23	5.75	6	182	10	5
7	428	10	2.5	7	190	8	4
8	432	4	1	8	190	0	0
9	432	0	0	9	180	-10	-5

Part 3: How many lattes will Anna now consume to maximize her utility?

Answer – 9 units of Lattes

Part 4: How many pastries will Anna now consume to maximize her utility?

Answer – 8 units of Pastry

Equilibrium Condition = MU/Dollar of Latte = MU/Dollar of Pastry

At 9 units of Latte and 8 units of Pastry the consumer gets highest utility.

Latte	9 units	4 dollars	$36
Pastry	8 units	2 dollars	$16
Total Expenditure			$52