2. Assume that a consumer purchases a combination of products A and B. The MUa is 5 and the Pa is $5. The MUb is 6 and the Pb is $6. What should this consumer do to maximize utility?
The MUa /Pa = 1. The MUb/Pb = 1. Nothing, the marginal utility per dollar spent is equal for both goods A and B.
3. Assume that a consumer purchases a combination of products Y and Z. The MUy is 50 and the Py is $25. The MUz is 20 and the Pz is $5. What should this consumer do to maximize utility?
The MUy /Py = 2. The MUz/Pz = 4. The consumer should consume more of product Z and less of
product Y until the marginal utility per dollar is the same for both products.
4. Naliaka quit her job at IBM where she earned $50,000 a year. She cashed in $50,000 in corporate bonds that earned 10% interest annually to buy a mini-bus. Naliaka has decided to buy the mini-bus and set up a commuter service between Nairobi and Eldoret. There are 1000 people who will pay $400 a year each for the commuter service; $280 from each person goes for gas, maintenance, insurance, and depreciation. She estimates that her entrepreneurial skills would have typically yielded a normal profit of $5,000 in another business.
(a) Complete the following questions: (1) What are Naliaka’s total revenues? (2) What are Naliaka’s explicit costs? (3) What is her accounting profit?
(b) List the important implicit costs that Naliaka has not included.
(c) What is Naliaka’s pure economic profit (loss)?
(a) (1) Total revenues are $400,000. (2) Explicit costs are $280,000. (3) The accounting profit is $120,000.
(b)(1) Salary that could be earned at IBM ($50,000). (2) Interest on invested savings ($50,000 x 10% = $5,000). Total implicit costs are $55,000.
(c)Economic profit is $87,000. [$400,000 – ($280,000 + $55,000) = $65,000]. [