Tutorial 4

Cup cakes Cream puffs 1. The table gives the total utility Jamal derives from the
Quantity TU Quantity TU consumption of cup cakes and cream puffs. Jamal has $12 to
0 0 0 0 spend on these two confectionery goods. The price of a cup
1 126 1 54.0 cakes is $3 and the price of a cream puff is $1.50.
2 243 2 103.5 a) Jamal's budget is $12. In order for Jamal to maximize his
3 342 3 145.5 utility, how many cup cakes and cream puffs should he buy?
4 414 4 177.0 b) Suppose the price of a cup cakes increase to $6. Jamal's
5 441 5 196.5 income does not change and neither does the price of a cream
puff. What combination of cup cakes and cream puffs will Jamal
buy now?
Pants Belts
Quantity MU Quantity MU 2. Tris is shopping for pants and belts. He has a budget of $100.
1 220 1 85 The price of a pair of pants is $20 and the price of a belt is $5.
2 180 2 65 His marginal utility schedules are above. What combination of
3 140 3 45 pants and belts does Tris buy? Explain your answer.
4 100 4 25
5 60 5 15

3. Olivia's income is $216 a year and she spends all of it on music CDs and movies on DVDs.
The price of a music CD is $18 and the price of a DVD is $18.
a) What is Olivia's real income in terms of CDs? What is her real income in terms of DVDs?
b) What is the relative price of a CD in terms of DVDs? What is the opportunity cost of a
DVD?
c) Calculate the equation for Olivia's budget line. Place the quantity of DVDs on the left side
of the equation.
d) Draw a graph of Olivia's budget line (with CDs on the horizontal axis). What is the slope
of Olivia's budget line? What determines its magnitude?

4. Olivia's income is $216 a year and she

spends all of it on music CDs and movies on
DVDs. The price of a music CD is $18 and the
price of a DVD is $18. The figure above
illustrates Olivia's preferences. What
quantities of CDs and DVDs does Olivia buy?
Explain your solution.