Posted: April 2nd, 2015

FIRST PAPER ANALYSIS

FIRST PAPER ANALYSIS

You have to decide whether or not it is worth your time to go on a date or to hang out with your friends. Either decision will increase your total utility, but you are constrained by your total income of $160.00. Here is a table of your current situation:

Cost of Date: $50
Cost of Hanging Out with Friends: $30

Date    Total Utility            Hanging Out with Friends    Total Utility
0    0                0                0
1    110                1                110
2    265                2                203
3    394                3                288
4    421                4                352
5    440                5                400

Calculate the Marginal Utility and Marginal Utility over Price (MU/P) and find Consumer Optimum. At what point should you go on the date? At what point should you hang out with your friends? Roughly at what point does going on a date equal hanging out with your friends?

Now, let’s say that you were given a promotion at work, which increases your income to $200.00.  Find Consumer Optimum. However, inflation just occurred and the cost of a date increased to $60 while hanging out with friends to $35. Calculate MU/P and find consumer optimum.

Graph Total Utility and then Marginal Utility with both (date and hanging out with friends) on the graph. Which of the two is more elastic? Inelastic? What is the Elasticity of Demand for a date? What is the Elasticity of Demand for hanging out with friends? What is the Cross-Price Elasticity of a date (X) relative to the price of hanging out with friends (Y). Is your date a complement or a substitute? What is your Income Elasticity for a date and hanging out with friends? Are dates and hanging out with friends a normal or inferior activity?