Question

George consumes two goods, milk and cookies. He has maximized his utility given his income. Milk costs $2 per gallon and he consumes it to the point where the marginal utility he receives from milk is 4. Cookies cost $4 per bag and the relationship between the marginal utility that George gets from eating a bag of cookies and the number of bags he eats per month is as follows:

Bags of Cookies 1 2 3 4 5 6
Marginal Utility 20 16 12 8 4 0
How many bags of cookies does George buy each month?
a. 1.
b. 2.
c. 3.
d. 4.

Answer 1

George buys 5 bags of cookies each month

Step-by-step explanation:

Given

`Milk = \$2` (per gallon)

`Marginal\ Utility\ (milk) = 4`

`Cookies = \$4` (per bag)

Required

Determine the number of bags of cookies he buys

First, we need to determine the marginal utility of cookies

To solve this, we make use of the following formula:

`(MU\ of\ Milk)/(Cost\ of\ Milk) = (MU\ of\ Cookies)/(Cost\ of\ Cookies)`

Substitute values for

MU of Milk = 4

Cost of Milk = 2

Cost of Cookies = 4

This gives:

`(4)/(2) = (MU\ of\ Cookies)/(2)`

`2 = (MU\ of\ Cookies)/(2)`

`MU\ of\ Cookies = 2 * 2`

`MU\ of\ Cookies = 4`

From the given table:

The corresponding bags of cookies for marginal utility of 4 is 5

Hence:

George buys 5 bags