Question

The meal plan at university A lets students eat as much as they like for a fixed fee of $500 per semester. The average student there eats 250 pounds of food per semester. University B charges $500 for a book of meal tickets that entitles the student to eat 250 pounds of food per semester. If the student eats more than 250 pounds, he or she pays $2 for each additional pound; if the student eats less, he or she gets a $2 per pound refund. If students are rational, at which university will average food consumption be higher? Explain briefly. (LO3)

Answer 1

The average consumption is higher in University A. than in University B

Explanation:

Marginal cost is known as the cost borne when an extra unit of output is being produced. Sunk cost is the cost once incurred cannot be recovered

The marginal cost at university A is $0 because they dont have to pay anything over and above $500. This $500 is the sunk cost for students at university A. The marginal cost at university B is $2 because they can consume only 250 pounds of food making them careful about the quantity of food they eat.

Sunk cost is not considered while making a decision, so the marginal cost of University A is $0 and that in University B is $2.

Therefore, we are concluding that the average consumption is higher in University A.