Question

Suppose you have the following information about the costs of a new video game and new board game, along with the utility generated from each purchase for Libby. The video game costs $25 and would provide Libby with a marginal utility of 50 utils. The board game costs $15 and would provide Libby with a marginal utility of 45 utils.

a. If Libby wants to maximize her marginal utility per dollar. She would choose to purchase the:
i. board game.
ii. video game.

Now suppose Libby's grandmother is purchasing one of the above games as a gift for Libby. Assume Libby incurs no cost for the game and that she does not receive the difference between the two games If she chooses the Cheaper game,

b. Libby will likely ask her grandmother to purchase the:
i. video game.
ii. board game.

Answer 1

a. i. board game

b. i. video game

Step-by-step explanation:

Marginal utility is the change is total utility after consuming one additional unit. The consumer will be able to maximize its marginal utility when marginal utility of good 1 per one dollar equals to marginal utility of good 2 per one dollar.

In this case of the marginal utility libby will get from from video game is;

50 utils / $25 = 2.

Libby will get marginal utility from board game;

45 utils / $15 = 3

Libby will choose to purchase board game as the marginal utility of board game per dollar is higher than video game.

b. When Libby incurs no cost for the purchase of game than she is likely to go for video game option as the total marginal utility from video game is higher than board game.