Microeconomics Canadian 14th Edition

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Chapter 07 - Consumer Choice and Utility Maximization

Chapter 07 - Consumer Choice and Utility Maximization

McConnell Brue Flynn Barbiero 14ce

DISCUSSION QUESTIONS

1. Complete the following table and answer the questions below: LO7.1

a. At which rate is total utility increasing: a constant rate, a decreasing rate, or an increasing rate?
How do you know?
b. “A rational consumer will purchase only 1 unit of the product represented by these data since
that amount maximizes marginal utility.” Do you agree? Explain why or why not.
c. “It is possible that a rational consumer will not purchase any units of the product represented
by these data.” Do you agree? Explain why or why not.

Answer: Missing total utility data, top – bottom: 18; 33. The missing total utility for the second
unity can be found by adding the marginal utility (change in utility) to the total utility for the
first unit. By consuming the second unit, 8 more units of utils are added; thus total utility is 18
(= 10 + 8). Missing marginal utility data, top – bottom: 7; 5; 1. The missing marginal utility
values are found by subtracting the total utility for the previous unit consumed from the total
utility of the unit with the missing value (the change in utility). The marginal utility for the third
unit is 7, which equals 25 (total utility for the third unit) minus 18 (total utility for the second
unit).
a. A decreasing rate; because marginal utility is declining.
b. Disagree. The marginal utility of a unit beyond the first may be sufficiently great
(relative to product price) to make it a worthwhile purchase. Consumers are interested
in maximizing total utility, not marginal utility.
c. Agree. This product’s price could be so high relative to the first unit’s marginal utility
that the consumer would buy none of it.

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Chapter 07 - Consumer Choice and Utility Maximization

2. Mrs. Simpson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents,
respectively. At present she is buying these products in amounts such that the marginal utilities
from the last units purchased of the two products are 80 and 70 utils, respectively. Is she buying
the utility-maximizing combination of bread and milk? If not, how should she reallocate her
expenditures between the two goods? LO7.2

Answer: Mrs. Wilson is not buying the utility-maximizing combination of bread and milk
because the marginal utility per cent spent on each good is not equal. The marginal
utility per cent of bread is 0.8 (= 80 utils/100 cents); the utility per cent of milk is 0.875
(= 70 utils/80 cents). Mrs. Wilson should buy more milk and less bread.

3. How can time be incorporated into the theory of consumer behaviour? Explain the following
comment: “Want to make millions of dollars? Devise a product that saves Americans lots of
time.” LO7.2

Answer: Time is money. This expression is a time-saving way of making the point that
for a person who can make so much per hour, every hour spent not working is so much
money not made. A person can be said to “consume” a ball game or an evening at the
theater. If the ball game costs $10 and the theater $20, at first sight one could say the ball
game is a better deal. But if the person makes $20 an hour and is forgoing this in taking
the time off, then we must take into account the time spent at the ball game or at the
theater. If the ball game goes into extra innings and takes 4 hours, then its total cost is
$90 (= $10 + $80). If the theater takes 3 hours, its total cost is $80 (= $20 + $60).
Assuming the marginal utility of the ball game and attending the theater are the same, the
theory of consumer behaviour (with time taken into account) would therefore have this
consumer going to the theater.

4. Explain what is meant by the following statements:LO7.2

a. Before economic growth, there were too few goods; after growth, there is too little time.
b. It is irrational for an individual to take the time to be completely rational in economic decision
making.
c. Telling your spouse where you would like to go out to eat for your birthday makes sense in
terms of utility maximization.

Answer:
a. Before economic growth, most people lived at the subsistence level. By practically
anyone’s definition, this implies “too few goods.” After economic growth, goods are
in relative abundance. To make (or consume) more takes time, but the relative
abundance of goods means that there are already many goods to enjoy. So, now there
is a clash between the use of time to make more goods and the use of time to relax and
enjoy the goods one already has. There just isn’t enough time.

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Chapter 07 - Consumer Choice and Utility Maximization

b. To be completely rational in economic decision making, provided one does not take
time into consideration, one has to take account of every factor. This would take a
great deal of time. One could not, for example, make any purchase without first
searching the classifieds to see whether a better deal could be had, rather than simply
heading for the nearest store. However, this would be most irrational, for time does
have value. While making an extensive search before making any deal, one would be
forgoing the income to make this or any deal. For every penny saved to make the
perfect deal, one would be losing dollars in income because of the time spent in
making the perfect deal.
c. There is little time sacrificed in making a request to your spouse for the restaurant
where you eat on your birthday. If you eat there, the benefit will likely exceed the
cost. It also reduces the probability of eating at a restaurant where the market value
(purchase price) exceeds the utility to the recipient.

5. In the last decade or so there has been a dramatic expansion of small retail convenience stores
(such as Mac’s, 7 Eleven, Becker’s, etc.), although their prices are generally much higher than
prices in large supermarkets. What explains the success of the convenience stores? LO7.2

Answer: These stores are selling convenience as well as the goods that are purchased
there. Because of their small size and convenient locations, they save busy consumers
time. In an era when most consumers are working at least 40 hours per week, their time
is valuable, and when only a few items are needed, the time saved must be worth the
additional cost one pays for shopping at these convenience stores. (You seldom, if ever,
see anyone buying a week’s worth of groceries at such shops.)

6. Many apartment-complex owners are installing water meters for each apartment and billing the
occupants according to the amount of water they use. This is in contrast to the former procedure
of having a central meter for the entire complex and dividing up the collective water expense as
part of the rent. Where individual meters have been installed, water usage has declined 10 to 40
percent. Explain that drop, referring to price and marginal utility. LO7.3

Answer: The way we pay for a good or service can significantly alter the amount
purchased. An individual living in an apartment complex who paid a share of the water
expense measured by a central meter would have little incentive to conserve. Individual
restraint would not have much impact on the total amount of water used.
Suppose there were 10 apartments in the complex; each apartment would be billed for
one-tenth of the cost of the water. A single gallon of water would carry a price equal to
one-tenth the amount charged by the water district. The very low price per gallon would
encourage the use of water until the marginal utility of an additional gallon was
correspondingly low. If the tenants paid separately for their own water, the full market
price of water would be considered when making their consumption choices.

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Chapter 07 - Consumer Choice and Utility Maximization

7. Using the utility-maximization rule as your point of reference, explain the income and
substitution effects of an increase in the price of product B, with no change in the price of product
A. LO7.4

Answer: The utility-maximization rule compares the marginal utilities per dollar of goods
under consideration (in this case A and B). An increase in the price of product B would
reduce the marginal utility per dollar of B. This would discourage consumption of B, and
with a pure income effect, would not alter consumption of A. If the increased price of B
caused the marginal utility per dollar of the last unit of B to fall below the MU/$ of the
next unit of A, we would expect the consumer to substitute A for B in consumption
(substitution effect).

8. ADVANCED ANAYLSIS A “mathematically fair bet” is one in which the amount won will
on average equal the amount bet, for example when a gambler bets, say, $100 for a 10 percent
chance to win $1,000 ($100 = .10 x $1,000). Assuming diminishing marginal utility of dollars,
explain why this is not a fair bet in terms of utility. Why is it even a less fair bet when the
“house” takes a cut of each dollar bet? So is gambling irrational? LO7.4

Answer: Because the marginal utility of money diminishes the more you have, the utility
of the $100 used to make the bet is greater than the $900 that you might gain ($1,000 -
$100) if you win the bet.
It is even less of a “fair bet’ when the “house” takes its cut, because the $100 bet has the
possibility of yielding less than $900 in winnings.
Is gambling irrational? Maybe. The activity of gambling may provide enough extra utility
to offset the poor utility odds of winning.

The LAST WORD In what way is criminal behaviour similar to consumer behaviour? Why do
most people obtain goods via legal behaviour as opposed to illegal behaviour? What are society's
main options for reducing illegal behaviour?

Answer:
Both the lawful consumer and the criminal try to maximize their total utility. (Answers
may vary.)
Most people choose legal behaviour because they see the price of illegal behaviour to be
greater than the marginal benefit. The costs include guilt, direct costs (supplies and
tools), loss of freedom, and the forgone income earned through legal behaviour.
Society's main option to reduce illegal behaviour is to increase the cost of engaging in it.
They can do this many ways. Guilt costs can be increased through family, educational,
and religious efforts. They can get better locks and alarms forcing the criminal to spend
more money on better tools. They can provide higher incomes for legal behaviour,
increasing the opportunity cost. They can increase policing to make it more likely the
criminal will be caught.

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Chapter 07 - Consumer Choice and Utility Maximization

REVIEW QUESTIONS

1. True or false. The law of diminishing marginal utility predicts the consumption behaviour of
addicts quite well. LO7.1

Answer: false.
The law of diminishing marginal utility does not predict the consumption behaviour of
addicts well at all. That is because the law predicts that, other things equal, successive
units will be less and less valuable to a person. Thus, people should not keep on
consuming additional units relentlessly. But an alcoholic, for instance, will often purse a
15th drink on a given day with as much intensity as he pursued his first drink that day.
And a gambling addict will often bet his final dollar with as much alacrity as he bet his
first. Those suffering from addiction appear to behave as if the marginal utility of the
drug or behaviour to which they are addicted remains high no matter how much of the
drug or behaviour they engage in.

2. Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the
newspapers cost $2.50 each. Suppose that his MU from the final magazine is 10 utils while his
MU from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank
should: LO7.2
a. Reallocate spending from magazines to newspapers.
b. Reallocate spending from newspapers to magazines.
c. Be satisfied because he is already maximizing his total utility.
d. None of the above.

Answer: a, reallocate spending from magazines to newspapers

Frank is not currently maximizing the utility that he could get from his $75 budget and
should reallocate spending from magazines to newspaper in order to increase the total
utility that he receives from his budget.
This can be seen by examining the MU per dollar that he is currently getting from the last
magazine and the last newspaper. The MU per dollar from the last magazine is 10/$5 = 2
utils per dollar. The MU per dollar from the last newspaper is 10/$2.50 = 4 utils per
dollar. Thus, Frank could gain more total utils if he spent less on newspapers and more
on dollars.
As an example, imagine that Frank cut his purchases of magazines by one, reducing them
from 10 purchased to only 9 purchased. That would free up $5 that he could spend on
newspapers. Since newspapers cost $2.50 each, he could purchase two newspapers.
Now, look at what happens to his total utility as he makes that change in consumption.
He will lose 10 utils by consuming one fewer magazine (because the MU of magazines is
10). But he will gain more than 10 utils by consuming two additional newspapers
(because the MU of an additional newspaper is 10 utils and he will be consuming two
additional newspapers). Thus, by reallocating his spending from the product with the
lower MU per dollar to the product with the higher MU per dollar, Frank will be able to
increase the total utility that he receives from his budget.

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Chapter 07 - Consumer Choice and Utility Maximization

3. Demand curves slope downward because, other things held equal, LO7.3
a. An increase in a product’s price lowers MU.
b. A decrease in a product’s price lowers MU.
c. A decrease in a product’s price raises MU per dollar and makes consumers wish to purchase
more units.
d. An increase in a product’s price raises MU per dollar and makes consumers wish to purchase
more units.

Answer: c, A decrease in a product’s price raises MU per dollar and makes consumers
wish to purchase more units.
Rational consumers decide how to spend their limited budgets by comparing the marginal
utilities per dollar that they can get from various products. If the prices of all other
products stay the same while the price of product X falls, then the MU per dollar of
money spent on product X will increase. That will mean that any money spent
purchasing units of product X will get the consumer more MU than previously. Thus,
consumers interested in getting as much utility as possible when spending their limited
budges will want to spend more of their limited budgets on product X. This behaviour
explains the downward slope of demand curves because a decrease in the price of product
X leads to an increase in the quantity demanded of product X.

4. Jermaine spends his money on cucumbers and lettuce. If the price of cucumbers falls, the MU
per dollar of cucumbers will ______________ and Jermaine will _______________ cucumbers
for lettuce. LO7.4
a. Fall; substitute
b. Rise; substitute
c. Fall; supply
d. Rise; demand

Answer: b, rise; substitute

When the price of cucumbers falls, the MU per dollar of cucumbers will rise. As a result,
each dollar spent on cucumbers will now bring more marginal utility than it did
previously. Cucumbers thus become relatively more attractive than they were previously
and so Jermaine will switch, or substitute, some of his spending away from lettuce and
towards cucumbers in order to maximize his utility given the new, lower price of
cucumbers.

5. Tammy spends her money on lemonade and iced tea. If the price of lemonade falls, it is as
though her income __________________. LO7.4
a. increases
b. decreases
c. stays the same

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Chapter 07 - Consumer Choice and Utility Maximization

Answer: a, increases.
A person’s income is not same thing as their budget. Rather, their income is the amount
of goods and services that they can purchase with their budget. Thus, when the price of
something that they purchase falls, their income rises because they can now purchase
more goods and services than they did before.
Consider the following example. Suppose that Tammy originally has a $6 budget and
maximizes utility by purchasing 2 glasses of lemonade for $2 each and 2 glasses of iced
tea for $1 each. So her income of goods and services is 2 glasses of lemonade and 2
glasses of iced tea. Then suppose that the price of iced tea falls in half, to only $1 per
glass. Her budget of $6 remains unchanged, but she will now be able to purchase more
total items and thereby enjoy a higher income due to the lower price of lemonade.
This can be seen most directly by noting that her old income of 2 glasses of lemonade
and 2 glasses of iced tea will now only cost $4—which means that she has $2 left over to
increase her consumption of either iced tea or lemonade. The price reduction allows her
to consume more overall, which is the same as saying that her income of goods and
services has increased.

PROBLEMS

1. Mylie’s total utility from singing the same song over and over is 50 utils after one repetition,
90 utils after two repetitions, 70 utils after three repetitions, 20 utils after four repetitions, -50
utils after five repetitions, and -200 utils after six repetitions. Write down her marginal utility for
each repetition. Once Mylie’s total utility begins to decrease, does each additional singing of the
song hurt more than the previous one or less than the previous one? LO7.1

Answers: 50, 40, -20, -50, -70, -150; More than the previous one.

Feedback: Consider the following values: Mylie’s total utility from singing the same
song over and over is 50 utils after one repetition, 90 utils after two repetitions, 70 utils
after three repetitions, 20 utils after four repetitions, -50 utils after five repetitions, and -
200 utils after six repetitions.
Mylie's marginal utility can be found by calculating the change in total utility as she sings
the song one more time. The utility from singing the song the first time is 50, which is the
total utility of singing the song the first time, 50, minus the total utility of not singing the
song at all, 0. The utility from singing the song the second time is 40, which is the total
utility from singing the song the second time, 90, minus the total utility from singing the
song the first time, 50. Apply the same procedure to following repetitions of the song.
The marginal utility of the third time is -20 (= 70 - 90). The fourth time, -50 (= 20 - 70),
the fifth time, -70 (= -50 - 20). The sixth time, -150 (= -200 - (-50) = -200 + 50).
Once Mylie's total utility begins to decrease, each additional song hurts more than the
previous one because she is becoming worse in terms of utility (which is a measure of
individual welfare). As we can see above, after the second repetition, Mylie is actually
worse off. Also, the decline in utility increases after the second repetition.

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Chapter 07 - Consumer Choice and Utility Maximization

2. John likes Coca-Cola. After consuming one Coke, John has a total utility of 10 utils. After two
Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50 utils. Does
John show diminishing marginal utility for Coke or does he show increasing marginal utility for
Coke? Suppose that John has $3 in his pocket. If Cokes cost $1 each and John is willing to spend
one of his dollars on purchasing a first can of Coke, would he spend his second dollar on a Coke,
too? What about the third dollar? If John’s marginal utility for Coke keeps on increasing no
matter how many Cokes he drinks, would it be fair to say that he is addicted to Coke? LO7.1

Answers: Increasing; Yes; Yes.

Feedback: Consider the following values: After consuming one Coke, John has a total
utility of 10 utils. After two Cokes, he has a total utility of 25 utils. After three Cokes, he
has a total utility of 50 utils. Also, assume John has $3 in his pocket and Cokes cost $1
each.
John's marginal utility equals the change in total utility as he consumes an additional unit.
Thus, his marginal utility from the first Coke is 10 (= 10 - 0), his second Coke is 15 (= 25
- 10), and his third Coke is 25 (= 50 -25). Since his marginal utility is increasing at an
increasing rate he shows increasing marginal utility for Coke.
If John consumes the first can of Coke, we know that his marginal utility per dollar was
sufficient to induce the purchase. Since his marginal utility increases as he consumes
more Coke, his marginal utility per dollar will also increase (price does not change). This
implies that he will purchase the second Coke because it provides even more marginal
utility per dollar than the first Coke did. The same is true for the third can of Coke. He
will spend his entire income on Coke, thus it is fair to say he is addicted to Coke.

3. Suppose that Omar’s marginal utility for cups of coffee is constant at 1.5 utils per cup, no
matter how many cups he drinks. On the other hand, his marginal utility per doughnut is 10 for
the first doughnut he eats, 9 for the second he eats, 8 for the third he eats, and so on (that is,
declining by 1 util per additional doughnut). In addition, suppose that coffee costs $1 per cup,
doughnuts cost $1 each, and Omar has a budget that he can spend only on doughnuts, coffee, or
both. How big would that budget have to be before he would spend a dollar buying a first cup of
coffee? LO7.2

Answer: $10.

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Chapter 07 - Consumer Choice and Utility Maximization

Feedback: Consider the following example: Suppose that Omar’s marginal utility for
cups of coffee is constant at 1.5 utils per cup, no matter how many cups he drinks. On the
other hand, his marginal utility per doughnut is 10 for the first doughnut he eats, 9 for the
second he eats, 8 for the third he eats, and so on (that is, declining by 1 util per additional
doughnut). In addition, suppose that coffee costs $1 per cup, doughnuts cost $1 each, and
Omar has a budget that he can spend only on doughnuts and/or coffee.
To answer this question, we first need to calculate the marginal utility per dollar for
doughnuts. Recall that the marginal utility per dollar for a good is the marginal utility
divided by the price of the good (=MU/P). For the first doughnut we have 10 (=10/$1),
the second doughnut 9 (=9/$1), third 8, fourth 7, fifth 6, sixth 5, seventh 4, eighth 3, ninth
2, and tenth 1.
The marginal utility per dollar for every cup of coffee is 1.5 (=1.5/$1).
To determine how big the budget would have to be before John would spend a dollar
buying his first cup of coffee, we compare the marginal utility per dollar values. John will
purchase the first doughnut before he buys a cup of coffee because the marginal utility
per dollar for the doughnut is greater than the marginal utility per dollar for the cup of
coffee (10>1.5). The same is true for the second through the ninth doughnut. This implies
John will buy 9 doughnuts at the price of $1 before he buys his first cup of coffee.
Therefore his budget will need to $10 before he buys his first cup of coffee, $9 on the
doughnuts and $1 for the cup of coffee.

4. Columns 1 through 4 in the table below show the marginal utility, measured in utils, that
Ricardo would get by purchasing various amounts of products A, B, C, and D. Column 5 shows
the marginal utility Ricardo gets from saving. Assume that the prices of A, B, C, and D are,
respectively, $18, $6, $4, and $24 and that Ricardo has an income of $106. LO7.2

a. What quantities of A, B, C, and D will Ricardo purchase in maximizing his utility?

b. How many dollars will Ricardo choose to save?
c. Check your answers by substituting them into the algebraic statement of the utility-maximizing
rule (verify that all of the income has been exhausted between the various goods and savings).

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 Chapter 07 - Consumer Choice and Utility Maximization

Answer: (a) 4 units of good A, 3 units of good B, 3 units of good C, zero units of good D; (b)
$4; (c) $106 (= $18x4 + $6x3 +$4x3 + $24x0 + $4)

Feedback: Consider the following information and use the table above: the prices of A,
B, C, and D are, respectively, $18, $6, $4, and $24 and Ricardo has an income of $106.

The first step is to convert the marginal utility values into marginal utility per dollar
values. Recall this is MU/P.

Marginal Marginal Marginal Marginal Marginal Marginal Marginal Marginal units

Utility Utility Utility Utility Utility Utility Utility Utility
per dollar per dollar per dollar per dollar per dollar per dollar per dollar per dollar
unit 1 unit 2 unit 3 unit 4 unit 5 unit 6 unit 7 unit 8
Column 1 4.00 3.00 2.50 2.00 1.50 1.00 0.83 0.67 4
Good A
Column 2 4.00 2.50 2.00 1.50 1.17 0.83 0.33 0.17 3
Good B
Column 3 3.75 3.00 2.00 1.75 1.25 1.00 0.88 0.75 3
Good C
Column 4 1.50 1.25 1.00 0.75 0.54 0.29 0.17 0.08 0
Good D
Column 5 5.00 4.00 3.00 2.00 1.00 0.50 0.25 0.13 4
Saving

The table above reads across rows (for example, the first row labeled 'Column 1-Good A'
is marginal utility per dollar for good A). The columns represent the marginal utility per
dollar for the different goods for each unit consumed and saving (for example, column 1
'Marginal Utility per dollar unit 1' tells us the marginal utility per dollar for the first unit
of every good and savings). This will makes the comparison a little easier.

To determine the optimal amount of goods that Ricardo will purchase, we choose the
goods with the highest marginal utility per dollar as we move from left to right. We
continue to do this until income is exhausted. We see that the first unit of savings ($1)
provides $5.00 worth of utility per dollar, so Ricardo makes this choice. Next he
purchases one unit of good A and good B with a marginal utility per dollar of 4 He will
also save the second dollar (an additional $1) because the marginal utility per dollar is 4.
The next decision leads Ricardo to purchase the first unit of good C with a marginal
utility per dollar of 3. Then he moves on to purchase the second unit of good A, the
second unit of good B, and he saves an additional dollar because the marginal utility per
dollar is 3for these goods. After these purchases, he has an income left of $53. Since he
has income left, he continues to buy more goods using the approach above.

In conclusion, Ricardo will consume 4 units of good A, 3 units of good B, 3 units of good
C, zero units of good D, and saves $4. This will exhaust his income $106 (= $18 x 4 + $6
x 3 +$4 x 3 + $24 x 0 + $4).

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Chapter 07 - Consumer Choice and Utility Maximization

5. You are choosing between two goods, X and Y, and your marginal utility from each is as
shown in the table below. If your income is $9 and the prices of X and Y are $2 and $1,
respectively, what quantities of each will you purchase to maximize utility? What total utility will
you realize? Assume that, other things remaining unchanged, the price of X falls to $1. What
quantities of X and Y will you now purchase? Using the two prices and quantities for X, derive a
demand schedule (prices and quantities demanded table) for X. LO7.3

Answer: X = 2 units, Y = 5 units; total utility = 48; X = 4, Y = 5; Demand schedule =

Price Demanded Quantity Demanded
2 2
1 4

Feedback: Consider the following table and information as an example:

Your income is $9 and the prices of X and Y are $2 and $1, respectively.

The first step is to convert the marginal utility values into marginal utility per dollar
values. Recall this is MU/P. See the table below.

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Chapter 07 - Consumer Choice and Utility Maximization

Marginal Marginal Marginal Marginal Marginal Marginal Units

Utility Utility Utility Utility Utility Utility
per per per per per per
dollar dollar dollar dollar dollar dollar
unit 1 unit 2 unit 3 unit 4 unit 5 unit 6
Good Y 8.00 7.00 6.00 5.00 4.00 3.00 5
(first price)
Good X 5.00 4.00 3.00 2.00 1.50 1.00 2
(first price)
Good Y 8.00 7.00 6.00 5.00 4.00 3.00 5
(second
price)
Good X 10.00 8.00 6.00 4.00 3.00 2.00 4
(second
price)

The first two rows define the marginal utility per dollar for goods X and Y when the price
of good X is $2 and the price of Good Y is $1. Each column is the marginal utility for the
unit consumed (Marginal utility per dollar for unit 1 is for the first unit consumed,
Marginal utility per dollar for unit 2 is for the second unit consumed, etc...).
To determine the optimal number of goods to purchase we choose the goods with the
highest marginal utility per dollar as we move from left to right. We continue to do this
until income is exhausted.
First, we only consider the first two rows for Goods X and Y for the first price of good X
(price of X is $2). We purchase the first unit of good Y with a marginal utility per dollar
of 8. Next we purchase the second unit of good Y with a marginal utility per dollar of 7.
Followed by the third unit of good Y with a marginal utility per dollar of 6. Continuing
on, we purchase the fourth and fifth unit of Good Y and the first and second unit of good
X 5and4marginal utility per dollar). Thus, we purchase 5 units of good Y and 2 units of
good X. The total cost is $9 (= $5 x 5 + $2 x 2), which exhausts income.
The total utility is then found by adding up the marginal utility values for the goods
consumed using the values in the original table. The total utility from good Y is 30 (=8 +
7 + 6 + 5 + 4) and the total utility from good X is 18 (=10 + 8). The sum of these two
values is the total utility, which equals 48 (=30 + 18).
Now we consider the case where the price of good X falls to $1.
Here, we only consider the last two rows for Goods X and Y for the second price of good
X. Here our first purchase is the first unit of good X with a marginal utility per dollar of
10. Next we purchase the second unit of good X and the first unit of good Y with a
marginal utility per dollar of 8.00. We continue this process until income is exhausted.
The optimal consumption level for good X is 4 and for good Y is 5.
This gives us the ordered pairs for good X: (P = 2, Q = 2) and (P = 1, Q = 4). We can use
these ordered pairs to graph the demand schedule (not required).

7-12
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consent of McGraw-Hill Education.
Chapter 07 - Consumer Choice and Utility Maximization

6. ADVANCED ANAYLSIS Let MUA = z = 10 - x and MUB = z = 21 - 2y, where z is marginal

utility per dollar measured in utils, x is the amount spent on product A, and y is the amount spent
on product B. Assume that the consumer has $10 to spend on A and B—that is, x + y = 10. How
is the $10 best allocated between A and B? How much utility will the marginal dollar yield?
LO7.3

Answer: $7 on good B; $3 on good A; MUA = 7, MUB = 7.

Feedback: To solve this system of equations we set the MUA=MUB. This is required if
we are maximizing utility. This leaves with only x and y to solve for using the
individual's budget constraint.
Consider the following equations: Let MUA = z = 10 - x and MUB = z = 21 - 2y, where z
is marginal utility per dollar measured in utils, x is the amount spent on product A, and y
is the amount spent on product B. Also, assume that the consumer has $10 to spend on A
and B—that is, x + y = 10.
We know from our optimization rule that MUA=MUB, which implies 10 - x = 21 - 2y. Or,
after some rearranging, 2y - x = 11. Combining this equation with our budget constraint,
x + y =10, we have two equations and two unknowns (x and y).

Use the budget constraint to solve x, or x = 10 - y. Substitute x from this equation into
our optimality rule (2y - x = 11), which gives us 2y - (10 -y) = 11. Again after some
rearranging, we have 2y - 10 + y = 11, or 3y = 21. Thus, we spend $7 on good B. Using
our budget constraint 9x + y =10), this implies we spend $3 on good A.
To check our answer, substitute these values into the marginal utility equations: MUA=
10 - x, or MUA = 10 -3 = 7 and MUB = 21 - 2y = 21 -2x7 = 7. Thus, MUA=MUB., and the
marginal dollar will yield 7 utils.

7-13
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consent of McGraw-Hill Education.
Chapter 07 - Consumer Choice and Utility Maximization

7. Suppose that with a budget of $100, Deborah spends $60 on sushi and $40 on bagels when
sushi costs $2 per piece and bagels cost $2 per bagel. But then, after the price of bagels falls to $1
per bagel, she spends $50 on sushi and $50 on bagels. How many pieces of sushi and how many
bagels did Deborah consume before the price change? At the new prices, how much money
would it have cost Deborah to buy those same quantities (the ones that she consumed before the
price change)? Given that it used to take Deborah’s entire $100 to buy those quantities, how big is
the income effect caused by the reduction in the price of bagels? LO7.4

Answers: 30 pieces of sushi and 20 bagels; $80 (= (30 x $2) + (20 x $1)); $20.

Feedback: Consider the following values as an example. Suppose that with a budget of
$100, Deborah spends $60 on sushi and $40 on bagels when sushi costs $2 per piece and
bagels cost $2 per bagel. But then, after the price of bagels falls to $1 per bagel, she
spends $50 on sushi and $50 on bagels.
This implies that Deborah bought 30 pieces of Sushi (=$60/$2) and she bought 20 bagels
(=$40/2) before the price change.
If Deborah purchased the same quantities of Sushi and bagels with the new prices it
would only cost her $80. She still spends $60 on Sushi because the price hasn't changed
(still $2) and she was consuming 30 pieces. However, the cost of the 20 bagels has fallen
to $20 because the price of the bagel is only $1 now.
This implies Deborah has an additional $20 to spend as a result of the price decrease on
bagels (= $100 (original cost) - $80 (new cost)).

7-14
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consent of McGraw-Hill Education.
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 LXV.—NORTH OF DENMARK PLACE.

To the north of Denmark Place the frontage to High Street

seems to have been fully built on before 1658 (Plate 3). Originally the
garden of the Hospital extended as far as here, for the limits of the
parish of St. Margaret, Westminster, are described in 1222, as
stretching along what is now Oxford Street as far as the Hospital
garden.[672] In somewhat later times the principal feature of this
triangular plot was The Crown inn and brewhouse, which is referred
to as early as 1452[673] as “a brewhouse called The Crowne” with six
cottages adjoining. It will be seen, therefore, that even at that date
there were a number of buildings on this plot. Included in the
portion of the Hospital’s property which fell to the share of Katherine
Legh were “one close rent xijs and iiijd by the yere there goinge oute
of a mese called The Crowne, and one chieff rente of vis by yere
goyng oute of a brew house there, nowe so late in the tenure or
occupacion of one Richard Lightfoot.” When next heard of The
Crown brewhouse, with a close of 3 acres[674] and an orchard and
garden adjoining, belonged to John Vavasour, whose son Nicholas in
1615 sold it to William Bowes.[675]
At a spot immediately opposite The Crown at one time stood
the pound, and according to Maitland[676], this was also the situation
of the gallows, between the date of their removal from the Elms in
Smithfield about the year 1413, and their further subsequent removal
to Tyburn. It does not appear, however, that Maitland had any
authority for the statement as to the removal of the gallows from
Smithfield. As regards the further removal to Tyburn, if it ever took
place it must have been before the year 1478, when it is quite certain
that the gallows were already in the position occupied by them for
centuries to come, viz., opposite the southern end of Edgware Road.
There is, indeed, a very considerable probability that this was the
case even in Edward I.’s reign,[677] and it seems improbable that a
permanent gallows ever stood in St. Giles at all.[678]
The pound was originally[679] in High Street, St. Giles, just to
the west of where Endell Street now issues, and was removed thence
in 1656 to the junction of High Street, Oxford Street and Tottenham
Court Road.[680]
 LXVI.—SITE OF “THE ROOKERY”
(BAINBRIDGE STREET, LAWRENCE
STREET, MAYNARD STREET, ARTHUR
STREET and BUCKNALL STREET).

Included in that part of the Hospital property which fell to

Lord Lisle’s share was “one close lyinge before the greate gate there
conteyninge by estimacion 16 acres, with appurtenances, nowe or
late in the occupacion of Maister Magnus.”[681] From this description
Parton had some justification in assuming that the ground covered
the site of Baynbridge Street, Arthur Street, etc. If this is correct,
however, the close must have been split up by the early part of
Elizabeth’s reign, and that part which covered the sites of the streets
in question was, in 1583, in the possession of George Harrison. On
his death in that year it was found[682] that he was seized inter alia of
“a close ... called Le Church Close in the parish of St. Giles,
containing by estimation five acres of pasture.” He also owned 13
messuages with gardens on the north side of High Street, stretching
westward from The Maidenhead,[683] which he had purchased from
Lord Mountjoy,[684] but no record has been found which might
enable the previous owners of Church Close to be traced. In 1632
John Barbor alias Grigge bought[685] a number of the houses,
together with “all that close of meadow or pasture ... called ... Church
Close alias Williamsfeild ... conteyning 5 acres,” and in 1649 the
property was further transferred to Henry Bainbridge.[686]
Hollar’s Plan of 1658 (Plate 3) shows the commencement of
building on this area, and Parton[687] notes that Bainbridge Street
and Buckridge Street were built on before 1672. These two streets,
with Maynard Place and Dyott Street, obviously took their names
from the persons mentioned in a fine of 1676,[688] from which it
seems probable that Maynard, Buckridge and Dyott were the
married names of Bainbridge’s three daughters. Church Lane and
Church Street had obvious reference to Church Close. The locality
subsequently became one of the most disreputable districts in
London,[689] a state of things which was finally put an end to by
driving New Oxford Street[690] through the midst. At the same time
several of the old streets were abolished, and some of those which
remained had their names altered.
Prints, Water Colour Drawings, Etc.:—
In the collection of water colour drawings by J. W. Archer, preserved
at the British Museum are three of The Rookery, representing:
Entrance from High Street.
Part of The Rookery in 1844.
A cellar in The Rookery.
In the Heal Collection, preserved in the Holborn Public Library, are a
series of views illustrating The Rookery.
LXVII.—Nos. 100, 101 and 102, GREAT
RUSSELL STREET.
Ground landlord.
His Grace the Duke of Bedford, K.G.
General description and date of
structure.
Northward from the site of The Rookery extends the manor of
Bloomsbury, a full account of which is reserved for the volume
dealing with the parish of St. George, Bloomsbury.
A plan of part of the manor in 1664–5, preserved in the British
Museum and reproduced in Clinch’s Bloomsbury and St. Giles,
shows that the western end of Great Russell Street and the whole of
Bedford Square[691] occupy the sites of two fields called Cowles Field
and Cowles Pasture.
In Morden and Lea’s map of 1682, the only buildings shown
on the site of these fields are a few at the southern end of Tottenham
Court Road. Great Russell Street had, however, already been formed,
[692]
and houses were in existence on the south side.
Nos. 100 to 102 formed originally one house, which in 1785–6
was in the occupation of John Sheldon. It would therefore seem that
this was the house referred to by Elmes, who stated[693] that Sir
Christopher Wren designed a fine mansion in this street which was
afterwards occupied by his son, and “more recently by the celebrated
surgeon and anatomist, Mr. Shelden.”
The records of His Grace the Duke of Bedford, however, lend
no countenance whatever to the suggestion that Wren’s son occupied
the house, and indeed show Stephen Wren as residing in a house,
afterwards known as No. 32, on the south side of the street, in 1751,
when he wrote the letters “headed Great Russell Street,” on which
Elmes apparently relied in making his statement. As regards the
ascription of the design of the house to Sir Christopher Wren, the
Bedford Estate records afford no direct evidence.
There is, however, no doubt that these premises were
originally “Thanet House,” the Earl of Thanet having taken a lease of
the house for a term of 62 years from Michaelmas, 1693. It would
seem, indeed, that the Earl was actually in occupation some years
previously, if this was the mansion referred to in the statement that
the Earl’s eldest son was born “at Thanet House in Great Russell
Street, on April 29th, 1686.”[694]
After 1787 it was divided into two houses, and is thus shown
in the illustration included in Parton’s Hospital and Parish of St.
Giles, a reproduction of which is given on the next page. A further
division took place about 1820.
Writing in 1823, Elmes says:[695] “Sir Christopher’s noble
front, with its majestic cantaliver cornice, has now been taken down
by a speculative builder, and common Act of Parliament fronts run
up.” The present elevation corresponds to this description, and the
interiors of the houses are without any noteworthy features. It is
interesting to note that the “speculative builder” is shown by the
Bedford Estate records to have been Thomas Cubitt.

G. Scharf. Lithog.

Thanet House. Great Russell Street.

Condition of repair.
The premises are in good repair.
Biographical notes.
Thomas Tufton, 6th Earl of Thanet, was born in 1644, and died in
1729.[696] Parton[697] mentions that the autograph of the Earl, as a
vestryman of St. Giles, occurs in the parish books between the years 1684
and 1690. The death of his eldest son at “Thanet House in Great Russell
Street,” in 1686 has already been referred to.
When the Bloomsbury Rentals of His Grace the Duke of Bedford
begin in 1729 they show Sir Thomas Coke, Lord Lovel, in occupation of the
house. Sir Thomas Coke was a son of Edward Coke of Holkham. In 1718 he
married Lady Margaret Tufton, daughter and co-heir of the 6th Earl of
Thanet. In 1728 he was raised to the peerage as Baron Lovel, of Minster
Lovel, and in 1744 was created Viscount Coke, of Holkham, and Earl of
Leicester. He died in 1759.
In 1755, on the expiration of the Earl of Thanet’s lease, he had
obtained a reversionary lease of Thanet House, and the Countess of
Leicester is shown by the parish ratebooks in occupation for 1759–60.
For the years 1760–62 the same books give the name of “John
Bristow” in connection with the premises.
In 1765, until his death in 1767, the Marquess of Tavistock was in
occupation. This was Francis, son of John, fourth Duke of Bedford, by his
second wife, Gertrude, eldest daughter of John, first Earl Gower.
In 1768 Lady Tavistock was still residing at the house, and in 1770
Richard Heron was the occupier.
In 1771 the house was taken by Lord Apsley, afterwards Earl
Bathurst. Henry Bathurst, second Earl Bathurst, was born in 1714. He was
called to the Bar in 1736, and became King’s counsel ten years after. From
1735 to 1754 he represented Cirencester in Parliament, and his attachment
to the party of the Prince of Wales secured for him the offices of solicitor-
general and attorney-general to the Prince. In 1754 he was appointed judge
of the common pleas. In 1770 the great seal was entrusted to three
commissioners, of whom Bathurst was one, and in the following year, to
every one’s surprise, he was created Lord Chancellor and raised to the
peerage as Baron Apsley. In 1775 he succeeded his father in the earldom. He
resigned the seal in 1778, but from 1779 to 1782 was again a member of the
ministry as lord president of the Council. He died at Oakley Grove near
Cirencester in 1794. “By a universal consensus of opinion Earl Bathurst is
pronounced to have been the least efficient lord chancellor of the last
century.”[698] His residence at Thanet House lasted until 1778.
 In the following year the Bloomsbury Rentals show that the Hon.
Topham Beauclerk was in occupation. Topham Beauclerk, born in 1739, was
the only son of Lord Sydney Beauclerk. A man of wide reading and sprightly
conversation, he owes his fame principally to his great friendship with Dr.
Johnson, and the space which he occupies in the latter’s great biography. He
married Lady Diana Spencer, eldest daughter of the second Duke of
Marlborough, formerly wife of Lord Bolingbroke. Lady Diana was an
amateur artist, whose abilities excited the enthusiasm of Horace Walpole.
Beauclerk died at Thanet House on 11th March, 1780, and his library of
30,000 volumes, housed in a building “that reaches half way to
Highgate,”[699] was sold by auction in the following year. Lady Diana
survived him for many years, dying in 1808.
In 1905 His Grace the Duke of Bedford affixed at Nos. 101 and 102,
Great Russell Street, a bronze tablet commemorative of the residence of
Topham and Lady Diana Beauclerk.
In 1781 William Murray, first Earl of Mansfield took up his residence
at the house. Particulars of his life have already been given in the previous
volume of this series dealing with St. Giles-in-the-Fields.[700] His
occupation of Thanet House dates from the destruction of his mansion in
Bloomsbury Square by the Gordon Rioters in 1780. At Michaelmas, 1785, he
removed to Nos. 57–58, Lincoln’s Inn Fields.
The next occupant was John Sheldon, a distinguished anatomist,
whose residence here was apparently confined to the period 1786–7. He was
born in London in 1752. In due course he was apprenticed to Henry Watson
and studied anatomy at the latter’s private museum in Tottenham Court
Road. From 1777 to 1786[701] he maintained a private theatre at No. 70,
Great Queen Street, where he taught and carried on research work. He died
in 1808.
After 1787 the house was divided into two, the residents at which, up
to 1800, were Harvey Christian Combe and Charles Steers.
In the Council’s collection are:—
No. 19, Great Russell Street—View of front (photograph).
[702]“Thanet House,” Great Russell Street—Lithograph by G. Scharf
(print).
 LVIII.—BEDFORD SQUARE (General).

During the period including the latter half of the 17th and the
early years of the 19th century, several large estates were laid out in
the western district of London. The planning of these generally
included several squares, each provided with a central garden for the
use only of the residents living in the surrounding houses.
When the 112 acres composing the Duke of Bedford’s
Bloomsbury estate were developed, over 20 acres were laid out as
gardens for the use of the occupiers of the houses overlooking them.
[703]
This estate, with its wide streets and spacious squares, is an
excellent example of early town planning, and affords an illustration
of the advantages gained by the community when a large area such
as this is dealt with on generous lines by the owner.
Bedford Square is about 520 feet long and 320 feet wide
between the houses, and the oval and beautifully wooded garden
(Plate 61) measures 375 feet on the major and 255 feet on the minor
axis.
The general architectural scheme of the square is interesting.
Each side is separately treated as an entire block of buildings, having
a central feature and wings. The central feature of each side is carried
out in stucco, having pilasters and pediments in the Ionic order,
those to the north and south having five pilasters (Plate 97), and
those to the east and west, four (Plate 89). The western house being
smaller, however, has not the additional walling extending beyond
the pilasters.
The houses at the ends of each block have balustrades above
the main cornice, and, generally, the windows are ornamented with
iron balconies at the first floor level.
The round-headed entrance doorways, other than those to the
central houses, are rusticated in Coade’s artificial stone,[704] and
enclose a variety of fanlights, of which a typical example is shown in
No. 15 (Plate 80).
No drawing has been found showing the design for the laying
out of Bedford Square, which was carried out between the years 1775
and 1780. The plots were leased by the Duke to various building
owners. One plot was taken by Thomas Leverton, architect, and 24
by Robert Crews and William Scott, builders.[703]
These builders acquired many more plots on the estate, and it
may be supposed that, as they at times worked in partnership, the
whole of the buildings in the square and the houses in several of the
adjoining streets were erected by them, partly as a speculation and
partly as builders for other lessees.
There is much to support the view that Thomas Leverton was
the author of the general scheme and the designer of the houses. He
took up a building lease of No. 13 in 1775, practically at the beginning
of building operations. He was a well-known architect, who adopted
the style of the period as represented by Henry Holland and the
Brothers Adam.[705] His work shows well-balanced composition and
refinement of detail. He employed, moreover, many of the designers
who worked for the Brothers Adam, such as Bonomi, the clever
draughtsman and architect, Angelica Kauffmann and Antonio
Zucchi, the Italian artist. It is also said that he employed Flaxman to
execute carving, and skilled Italian workmen to carry out his
beautiful designs for plaster work on ceilings, several of which are
illustrated in this volume.
An example of his work has already been described in the
previous volume dealing with this parish,[706] namely at No. 65,
Lincoln’s Inn Fields, erected in 1772. It will be seen, by examining
plates Nos. 86 and 97 in that volume, that these designs show a
similar architectural expression to the houses of this square, and the
internal decoration (especially of his own house, and of No. 44)
follows the general character of that in Lincoln’s Inn Fields.
With regard to the suggestion[707] that the Brothers Adam were
the designers of Bedford Square, it may be said that the only
drawings found appertaining to the square by these celebrated
architects are preserved in the Soane Museum, and represent two
ceilings designed for Stainsforth, Esq., dated 1779. Geo. Stainsforth
took up his residence at No. 8, Bedford Square in that year,[708] but
the house had already been in existence for some time, as it is
referred to as the northern boundary of No. 7, on 20th November,
1777.[709] There is no evidence that designs for the ceilings referred to
were actually carried out, as the present ceilings of the house are
plain.
In the Council’s collection are:—
Bedford Square—
General view looking north-east (photograph).
[710]General view looking south-east (photograph).

General view of north side (photograph).

LXIX.—No. 1, BEDFORD SQUARE.[711]
Ground landlord and lessee.
Ground landlord, The Crown; lessee, Weedon Grossmith, Esq.
General description and date of
structure.
This house fills a gap between the premises in Bloomsbury
Street (formerly Charlotte Street) and those forming the eastern
block of the square. It is distinctive in its elevation (Plate 63), and
has marked characteristics of a Leverton design. The well-
proportioned entrance, though finished in plaster work, is highly
ornamented, the detail being unusually refined (Plate 64). The
introduction of an ornamental panel above the main cornice of the
building gives a graceful balance to the composition. In passing, it
may be noticed that the cornice of No. 2, although not in alignment
with that of this house, is of the same section.
The entrance doorway affords direct access to a hall of
uncommonly beautiful design, extending the full width of the house,
and divided by piers into three bays (Plate 62). The central bay has
two recesses, and is ceiled with a decorative plaster oval dome
resting on pendentives and segmental arches (Plate 66). The right-
hand bay has semi-circular ends (Plate 65) flanked by niches, and
there is also a niche in the centre of the side wall, over which is
placed a circular plaque. The bay to the left contains the staircase
(Plate 65). This also has semi-circular ends. The stone steps have
shaped soffits, the balustrades being of bronze, of graceful curvature
and tasteful design. The principal rooms have fine decorative detail
to the doors and windows, and rounded internal angles are given to
the walls. The dining room contains a carved wood mantelpiece
(Plate 67) and “Empire” grate; the chimney breast above being
ornamented with an oval plaque surrounded with floral festoons.
The lowest member of the cornice should be noticed, as it is similar
to that in the dining room of No. 13, Leverton’s own house, and is
composed of diminutive Greek Doric pillars suspended by their
capitals, a somewhat unusual form of decoration suggestive of
tassels.
The first floor has two rooms, that in the front containing a
white marble chimneypiece. The rear room is the studio. The