Eliza consumes 12 cappuccinos and 8 apple turnovers per week. The price of a cappuccino is $4 each and apple turnovers are $1 each
a. What is the amount of income allocated to cappuccino and apple turnover consumption?
b. What is the price ratio (the price of cappuccinos relative to the price of apple turnovers)?
c. Explain the meaning of the price ratio you computed.
d. If Eliza maximize utility, what is the ratio of the marginal utility of cappuccinos to the marginal utility of apple turnovers?
e. If the price of apple turnovers falls, will Eliza consume more apple turnovers, fewer apple turnovers, or the same amount of apple turnovers? Explain your answer using the rule of equal marginal utility per dollar.
What will be an ideal response?
a. Income = $56
b. Price of cappuccino / price of apple turnovers = $4 / $1 = 4
c. To buy a cappuccino, Eliza has to give up 4 apple turnovers.
d. MUcappuccinos / MUapple turnovers = Price of cappuccinos / Price of apple turnovers = $4 / $1 = 4
e. If the price of apple turnovers falls, the marginal utilities per dollar will not be equal. Specifically, MUcappuccinos / Price cappuccinos < MUapple turnovers / Price apple turnovers. Eliza can raise her total utility by buying more apple turnovers and fewer cappuccinos.
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