United States University
BUS544 – Managerial Economics
Module 3 – Assignment
A. Utility theory is important for understanding consumer choice.
Define total utility.
Define marginal utility.
State the law of diminishing marginal utility.
Explain why we cannot use the law of diminishing marginal utility to tell whether an
additional dollar of income is worth more to a poor man or a rich man.
B. Chuck has been hired by the Academic Department of a Community College to tutor students
who are struggling in the Math classes. Chuck does not have Internet service at home, so he
can either go to a local store that provides Internet for ten cents per minute and Skype
students or he can drive to Campus to meet them. The Community College is located 20 miles
from Chuck’s home and the round-trip costs of $5 in gasoline money. In both cases, he can only
tutor one student. He has a total of $20 per week to spend on tutoring. To make his preferred
choice, Chuck uses a handy utilimometer that measures his total utility from Skype call and
from Campus visits. Using the values given in the following table, figure out the points on
Chuck’s consumption choice budget constraint (it may be helpful to do a sketch) and identify
his utility-maximizing point. Also, take Chuck’s total utility information, and use the marginal
utility approach to confirm the choice of Internet minutes and campus visits that maximize
Chuck’s utility
Campus visits
0
1
2
3
4
5
6
7
8
9
10
Total Utility
0
80
150
210
260
300
330
200
180
160
140
Internet Minutes
0
20
40
60
80
100
120
140
160
180
200
Total Utility
0
200
380
540
680
800
900
980
1040
1080
1100
C. Albert is an avid consumer of two specific services, A and B. The following table shows the
total utility (TU) that Albert receives from consuming the services on a monthly basis.
a. Fill in the other columns of the table by calculating the marginal utilities for services A
and B and the ratios of marginal utilities to price for the two services. Assume that the
price of both services is $5. Be sure to use the “midpoint convention” when you fill out
the table.
b. If Albert allocates $100 to spend on both services, how many units will he buy of each?
c. How much will Albert spend on each service at the utility maximizing combination?
d. How much total utility will Albert experience by buying the utility-maximizing
combination?
e. Suppose the price of service B increases to $10. How many units of A and B will he buy
to maximize his utility now?
f. Draw Albert’s demand curve for service B between the prices of $10 and $5.
MU (A)
MUA/PA
Quantity
TU (A)
TU (B)
0
0
0
1
50
75
2
88
117
3
121
153
4
150
181
5
175
206
6
196
225
7
214
243
8
229
260
9
241
276
MU (B)
MUB/PB