A person has a basic choice between eating meals at home and eating meals in a restaurant. The cost of the food that is eaten at home is $10 per meal. The cost of a restaurant meal is $20. It takes two hours to eat a meal at home (including

Question

preparation time and cleanup time). It takes one hour of time to eat a meal in a restaurant. The marginal utilities of the home meal and the restaurant meal are the same. The person values time at $12 per hour. What does the theory of consumer behavior suggest the rational consumer will decide to do: eat at home or in a restaurant?

Please provide the best answer for the statement.

Answer 1

If time is not a consideration in the cost of a meal, then the marginal utility per dollar of a meal at home is greater than the marginal utility per dollar of the restaurant meal (MUh/$10 > MUr/$20). The consumer will eat meals at home. If, however, the value of time is included in the cost of a meal, then the marginal utility per dollar spent will be the greater for restaurant meals than home meals. The full cost of a home meal is $34 ($10 food plus $24 in time). The full cost of the restaurant meal is $32 ($20 in food and $12 in time). Since the marginal utility of restaurant and home meals are the same, the marginal utility per dollar of restaurant meals will be greater than the marginal utility per dollar of home meals when the value of time enters the calculation (MUh/$32 > MUr/$34).