Is Bill currently consuming in such a way as to maximizes

| August 31, 2017

Question
Part One:

Bill regularly buys lattes and reading magazines. He has budgeted a certain amount of his income to these two goods and is spending that entire amount on the goods. Lattes cost $5.00 per cup and magazines are $3.00 each. His marginal utility from his last latte was 320 utils and his marginal utility from the last magazine he read was 280 utils.

1. Is Bill currently consuming in such a way as to maximizes his total utility given his budget? Why or why not?

2. If Bill is not in a position of consumer equilibrium, how should he change his consumption of lattes and magazines to bring about equilibrium? Explain using the concept of marginal utility per dollar spent.

3. Suppose Bill’s budget for lattes and magazines increases. How will this impact his consumption of lattes and magazines?

4. Suppose Bill is in a state of consumer equilibrium and the price of lattes increases. How should he change his consumption?

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