Organizational Models: Properties and Operating Environments

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A. Utility theory is important for understanding consumer choice.

a. Define total utility.

b. Define marginal utility.

c. State the law of diminishing marginal utility.

d. 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	Total Utility	Internet Minutes	Total Utility
0	0	0	0
1	80	20	200
2	150	40	380
3	210	60	540
4	260	80	680
5	300	100	800
6	330	120	900
7	200	140	980
8	180	160	1040
9	160	180	1080
10	140	200	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.

Quantity	TU (A)	MU (A)	MUA/PA	TU (B)	MU (B)	MUB/PB
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