QUESTION 5The table below shows the marginal utility of good A, good B and good C for Betty.

Unit of goodsMarginal Utility for good A (MUA)Marginal Utility for good B (MUB)Marginal Utility for good C (MUC)1183912216361031433941230851027768246

(a) Suppose Betty has RM26 to spend on these three goods. The prices of good A, good B and good C are RM2, RM3 and RM1 respectively. What combination of three goods should be purchased in order to maximise utility?To maximize utility, we use the Utility Maximizing Rule :MUA/ PA= MUB/ PB = MUC/PC

STEP 1 Calculate the MU/P = Marginal Utility per dollar

Price : A = RM2, B = RM3, C = RM1

QAMUAMUA/PAQBMUBMUB/PBQCMUCMUC/PC0--0--0--1189139131121221682361221010314733311399412643010488510552795776846248666

MUA/ PA= MUB/ PB = MUC/PC

16 utils/RM2 = 24 utils/RM3 = 8 utils/RM1

So betty should purchase 2 units of good A, 6 units of good B and 4 units of good C to maximise her utility.

2PA + 6PB + 4PC = 2(RM2) + 6(RM3) + 4(RM1) = RM26

What will she buy first?

The first B gives you 13 units of satisfaction per dollar which is more than the first A or C. So buy 1 B

What will she buy next?

The second B and the first C both give 12 units of satisfaction per dollar, so buy them.

What will she buy next? The third B since it gives 11 units of satisfaction per dollar than the others.

What is next?Keep shopping until you have spent all of your money.

(b) Based on the answer above, what is the total utility derived by Betty?

2 units of good A, 6 units of good B and 4 units of good C

TUA + TUB+ TUC = 34 + 189 + 39

= 262

Conclusion : Betty will get a total of 262 units of satisfaction.

Unit of goodsMUATUAMUBTUBMUCTUC0-0-0-011818393912122163436751022314483310893141260301388395107027165746687824189652