Use the following table to answer the question below. Cloe is given $4 of pocket money to be spent on either hard candies or chocolates. Chocolates cost 40 cents each and hard candies cost 80 cents each. The marginal utilities derived from the consumption of each product are as shown in the following table. Number of Items Marginal Utility of Chocolates Marginal Utility of Hard Candies1 60 1502 50 1403 40 1204 30 1005 20 806 10 707 5 508 0 20 If Cloe buys either chocolates or hard candies one piece at a time, what will be her first two purchases?Multiple Choicea hard candy, followed by another hard candya hard candy, followed by a chocolatea chocolate, followed by a hard candya chocolate, followed by another chocolate
Question
Use the following table to answer the question below. Cloe is given $4 of pocket money to be spent on either hard candies or chocolates. Chocolates cost 40 cents each and hard candies cost 80 cents each. The marginal utilities derived from the consumption of each product are as shown in the following table. Number of Items Marginal Utility of Chocolates Marginal Utility of Hard Candies1 60 1502 50 1403 40 1204 30 1005 20 806 10 707 5 508 0 20 If Cloe buys either chocolates or hard candies one piece at a time, what will be her first two purchases?Multiple Choicea hard candy, followed by another hard candya hard candy, followed by a chocolatea chocolate, followed by a hard candya chocolate, followed by another chocolate
Solution
Cloe will make her purchases based on the principle of utility maximization, which states that a consumer will choose a combination of goods that maximizes their total utility given their budget constraint.
In this case, Cloe has $4 and the price of chocolates is 40 cents while the price of hard candies is 80 cents. The marginal utility of each good is given in the table.
To maximize her utility, Cloe will compare the marginal utility per dollar spent on each good. This is calculated by dividing the marginal utility of the good by its price.
For the first hard candy, the marginal utility per dollar is 150/0.8 = 187.5. For the first chocolate, the marginal utility per dollar is 60/0.4 = 150.
Since the marginal utility per dollar is higher for the hard candy, Cloe will buy a hard candy first.
After buying the first hard candy, Cloe has 0.8 = $3.2 left.
For the second hard candy, the marginal utility per dollar is 140/0.8 = 175. For the second chocolate, the marginal utility per dollar is 50/0.4 = 125.
Again, the marginal utility per dollar is higher for the hard candy, so Cloe will buy another hard candy.
Therefore, the answer is "a hard candy, followed by another hard candy".
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