ECON 356
In Class Exercise Three
(link to answers)
NOTE: Of course utility cannot be measured -- so this is very theoretical and actually somewhat silly....
Mary has a weekly allowance of $10, all of which she spends on newspapers (N) and magazines (M), whose respective prices are $1 and $2. Her total utility from these purchases is given by U(N) + U(M).
If the values of U(N) and U(M) are as shown in the table, is Mary a utility maximizer if she buys 4 magazines and 2 newspapers each week? Explain.
| N | U(N) | M | U(M) |
| 0 | 0 | 0 | 0 |
| 1 | 12 | 1 | 20 |
| 2 | 20 | 2 | 32 |
| 3 | 26 | 3 | 40 |
| 4 | 30 | 4 | 44 |
| 5 | 32 | 5 | 46 |
In answering the question -- you might want to fill in the columns in the table below. M = marginal, P = price
| N | Total U(N) | MU(N) | MU(N)/PN | M | U(M) | MU(M) | MU(M)/PM |
| 0 | 0 | 0 | 0 | ||||
| 1 | 12 | 1 | 20 | ||||
| 2 | 20 | 2 | 32 | ||||
| 3 | 26 | 3 | 40 | ||||
| 4 | 30 | 4 | 44 | ||||
| 5 | 32 | 5 | 46 |
If Mary is not maximizing utility, how should she reallocate her allowance? Explain.