Name : Aldha Dwiputri

NIM : B1024181012

1. Assume that an individual consumes three goods, X, Y, and Z. The marginal utility
(assumed measurable) of each good is independent of the rate of consumption of
other goods. The prices of X, Y, and Z are, respectively, $1, $3, and $5. The total
income of the consumer is $65, and the marginal utility schedule is as follows:

Units Marginal Marginal Marginal

of utility utility utility
good of X of Y (units) of Z
(units) (units)
1 12 60 70
2 11 55 60
3 10 48 50
4 9 40 40
5 8 32 30
6 7 24 25
7 6 21 18
8 5 18 10
9 4 15 3
10 3 12 1

a. Given a $65 income, how much of each good should the consumer purchase to
maximize utility?
Answer:
First we need to calculate the marginal utility of all three goods per dollar.
Marginal utility/$ = Marginal utility/Price.

Marginal Utility Marginal Utility Marginal Utility

x/$ y/$ z/$
12 20 14
11 18.33 12
10 16 10
9 13.33 8
8 10.67 6
7 8 5
6 7 3.6
5 6 2
4 5 0.6
3 4 0.2

Now at utility maximising condition, Marginal Utility x / P = Marginal Utility y / P =

Marginal Utility z / P = 5.

Corresponding units of 5 utilise, for each of the good gives, x = 8 units, y = 9 units and z
= 6 units.

 Total Expenditure = 8 x 1 + 9 x 3 + 5 x 6
 TE = $65, which is the income or the maximum spending capacity.

b. Suppose income falls to $43 with the same set of prices; what combination will
the consumer choose?
Answer:
Now with less income in hand, the same utility maximising condition is followed,
Marginal Utility x / P = Marginal Utility y / P = Marginal Utility z / P = 8.
From the corresponding units of output, x = 5, y = 6 and z = 4 units.
 Total Expenditure = 5 x 1 + 6 x 3 + 5 x 4
 TE = $43, which is the income level.
 c. Let income fall to $38; let the price of X rise to $5 while the prices of Y and Z
remain at $3 and $5. How does the consumer allocate income now? What would
you say if the consumer maintained that X is not purchased because he or she
could no longer afford it?
Answer:

MUx/$ MUy/$ MUz/$ Mux*/P

12 20 14 2.4
11 18.33 12 2.2
10 16 10 2
9 13.33 8 1.8
8 10.67 6 1.6
7 8 5 1.4
6 7 3.6 1.2
5 6 2 1
4 5 0.6 0.8
3 4 0.2 0.6

Marginal Utility x*/ P depicts the new marginal utility per dollar. So, since the price of Y
and Z remains the same, the consumer would buy and spend all income on good Y and
Z and the same bundle. 6 x 3 + 4 x 5 = $38.

Because the price of X has increased, the marginal utility per dollar has decreased. So
the equation now is Marginal Utility y / P = Marginal Utility z / P > Marginal Utility x*/ P
so the consumer only consumes good Y and Z.

2. The general linear demand for good X is estimated to be

Q = 250,000 - 500P - 1.50M - 240PR
where P is the price of good X, M is average income of consumers who buy good X,
and PR is the price of related good R. The values of P, M, and P R are expected to be
$200, $60,000, and $100, respectively. Use these values at this point on demand to
make the following computations.
a. Compute the quantity of good X demanded for the given values of P, M, and
PR.
Answer :
Q = 250,000 - 500 P - 1.50 M - 240 PR
Q = 250,000 - 500 (200) - 1.50 (60,000) - 240 (100)
Q = 36,000

b. Calculate the price elasticity of demand E. At this point on the demand for X,
is demand elastic, inelastic, or unitary elastic? How would increasing the price
of X affect total revenue? Explain.
Answer :
ΔQ P
E=( )( )
ΔP Q

Where :
ΔQ
- = - 500
ΔP
P 200
- =
Q 36,000

200
 So, E = (−500) ( ) = - 2.78 (inelastic)
36,000
So, Demand for X, is demand inelastic that is less so influential on the change
in the quantity of goods requested.
c. Calculate the income elasticity of demand E M. Is good X normal or inferior?
Explain how a 4 percent increase in income would affect demand for X, all
other factors affecting the demand for X remaining the same.
Answer :
 ΔQ M
EM = ( ¿¿ )
ΔM Q

Where :
ΔQ
- = - 1.50
ΔM
M 60,000
- =
Q 36,000
60,000
 So, EM = ( - 1.50 ) ( ) = - 2.50 ( < 0, inferior good )
36,000
% ∆Q = ( % ∆M ) ( EM ) = 4% (-2.50) = -10%

d. Calculate the cross-price elasticity E XR. Are the goods X and R substitutes or
complements? Explain how a 5 percent decrease in the price of related good
R would affect demand for X, all other factors affecting the demand for X
remaining the same.
Answer :
ΔQ x PR
EXR = ( )( )
Δ PR Qx

Where :
Δ Qx
- = - 240
Δ PR
PR 100
- =
Qx 36,000
100
 So, EXR = ( -240 ) ( ) = - 0.67 (negative, complements)
36,000
% ∆Q = (%∆PR) (EXR) = (-5%)(-0.67) = 3.33%

҉ Thank You Sir  Stay safe and Stay healthy sir  ҉