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Chapter 6

Question 16
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You must read each slide, and complete any questions on the slide, in sequence.

A. Complete the table.

First-Run Movies Bottles of Wine
Quantity Total Utility Marginal Utility Quantity Total Utility Marginal Utility
0 0 - 0 0 -
1 140 1 180
2 260 2 340
3 360 3 460
4 440 4 510
5 500 5 540
Correct! Marginal utility is the satisfaction received from consuming one additional unit of a given product or service. It is found by dividing the change in total utility by the change in quantity. Looking at the first two levels of consumption of first-run movies, see that total utility increases from 0 to 140; 140 – 0 = 140 as the numerator. The quantity increases from 0 to 1; 1 – 0 = 1 as the denominator. Therefore, the marginal utility of the first movie is 140. For further review, see section “Total and Marginal Utility”.
Incorrect. Marginal utility is the satisfaction received from consuming one additional unit of a given product or service. It is found by dividing the change in total utility by the change in quantity. Looking at the first two levels of consumption of first-run movies, see that total utility increases from 0 to 140; 140 – 0 = 140 as the numerator. The quantity increases from 0 to 1; 1 – 0 = 1 as the denominator. Therefore, the marginal utility of the first movie is 140. For further review, see section “Total and Marginal Utility”.
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      First-Run Movies Bottles of Wine
      Quantity Total Utility Marginal Utility Quantity Total Utility Marginal Utility
      0 0 - 0 0 -
      1 140 140 1 180 180
      2 260 120 2 340 160
      3 360 100 3 460 120
      4 440 80 4 510 50
      5 500 60 5 540 30

      B. Assume that you have $50 a month to devote to entertainment (column labeled First-Run Movies) and wine with dinner (column labeled Bottles of Wine). What will be your equilibrium allocation if the price to see a movie is $10 and a bottle of wine costs $10 as well?

      		A.
      		B.
      		C.
      		D.
      Correct! For further review, see section “Maximizing Utility”.
      Sorry, but this answer is incorrect. The utility-maximizing combination of movies and wine occurs when the marginal utility per dollar for each is the same. Marginal utility per dollar is calculated by dividing marginal utility at each level of consumption by the market price. Thus, the marginal utility per dollar for one movie is 14, which is found by dividing 140 by $10. For further review, see section “Maximizing Utility”.
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          First-Run Movies Bottles of Wine
          Quantity Total Utility Marginal Utility Quantity Total Utility Marginal Utility
          0 0 - 0 0 -
          1 140 140 1 180 180
          2 260 120 2 340 160
          3 360 100 3 460 120
          4 440 80 4 510 50
          5 500 60 5 540 30

          C. Assume that you have $50 a month to devote to entertainment (column labeled First-Run Movies) and wine with dinner (column labeled Bottles of Wine). The price to see a movie is $10. A grape glut in California results in Napa Valley wine dropping in price to $5 per bottle, and you view this wine as a perfect substitute for what you were drinking earlier. Now what will be your equilibrium allocation between movies and wine?

          		A.
          		B.
          		C.
          		D.
          Correct! For further review, see section “Maximizing Utility”.
          Sorry, but this answer is incorrect. The utility-maximizing combination occurs when the marginal utility per dollar for each item is the same. Marginal utility per dollar is calculated by dividing marginal utility at each level of consumption by the market price. The marginal utility per dollar for 1 movie is 14, which is found by dividing 140 by $10. However, since the price for wine is lower, the marginal utility per dollar will increase. For example, the marginal utility per dollar for 1 bottle of wine is 36, found by dividing 180 by $5. For further review, see section “Maximizing Utility”.
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              First-Run Movies Bottles of Wine
              Quantity Total Utility Marginal Utility Quantity Total Utility Marginal Utility
              0 0 - 0 0 -
              1 140 140 1 180 180
              2 260 120 2 340 160
              3 360 100 3 460 120
              4 440 80 4 510 50
              5 500 60 5 540 30

              D. Assume that you have $50 a month to devote to entertainment (column labeled First-Run Movies) and wine with dinner (column labeled Bottles of Wine). The price to see a movie is $10. A grape glut in California results in Napa Valley wine dropping in price from $10 per bottle to $5 per bottle, and you view this wine as a perfect substitute for what you were drinking earlier. Given this information, calculate your elasticity of demand for wine over these two prices (see the midpoint method in Chapter 5).

              		A.
              		B.
              		C.
              		D.
              Correct! For further review, see section “Using Midpoints to Compute Elasticity”.
              Sorry, but this answer is incorrect. Recall that the midpoint formula for calculating percentage change requires the difference to be divided by the midpoint (or average). In this problem, the quantity demanded increases from 3 to 4 bottles of wine when the price falls from $10 to $5 per bottle. Therefore, Q0 is 3 and P0 is $10. Q1 is 4 and P1 is $5. For further review, see section “Using Midpoints to Compute Elasticity”.
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