 Answers to Questions for Critical Analysis

Why a Consumer Optimum Can Include “Unlimited” Consumption in a

Pay-by-the-Minute Café (p. 442)
What fact ultimately constrains consumption of any item said to be available in “unlimited”
amounts at a fixed price? (Hint: Recall the law of diminishing marginal utility)
Because of the law of diminishing marginal utility, the marginal utility derived from the consumption of
any item would ultimately become zero. Consumers try to avoid consuming any item with a negative
marginal utility, even if the item is available at a price of zero.

Monitoring the Provision of Legal Services to Ensure Attainment of a Consumer

Optimum (p. 444)
To ensure attainment of a consumer optimum, why might a client seek to ensure that the hourly
legal-service fee continues to apply to constant-quality hours of legal services?
Consumer optimum requires that a client would ensure that the last dollar spent on each quality-hour of
legal services yields the same amount of marginal utility as the last dollar spent on other items.

Do “Big-Box” Discount Retailers Contribute to Higher Obesity Rates among

Consumers? (pp. 446–447)
What happened to the marginal utility derived from food consumption as people responded to
lower food prices by purchasing more food?
People responded to lower food prices by purchasing more food, and more food consumption in turn
reduced their marginal utility from consumption of food items.

 You Are There

Confronting the Challenge of Comparing Levels of Disutility from Pain (p. 449)
1. Why might two people diagnosed with exactly the same type of pain-inducing physical
problem opt to place different levels of daily stress on their bodies?
The level of disutility or body stress from a given type of pain may be different across different
people.

2. What does Michel’s experience imply about the idea of computing levels of utility derived
from consumption and contrasting these utilities across individuals? Explain.
Comparing different levels of utility derived from consumption and contrasting these utilities
across individuals are effective ways to gauge people’s pain because this method provides more
reliable predictions about the levels of pain actually experienced by the people.

 Issues and Applications

Two Different Utility Issues Associated with a “Pacemaker for the Stomach”
(pp. 449–450)
1. Explain why it must be true, even for someone trying to lose weight, that the last bite of
food consumed must have positive marginal utility at a consumer optimum?
298   Miller • Economics Today, Nineteenth Edition

People will stop food consumption only if an additional bite of food generates zero or negative
marginal utility. Hence, even for those trying to lose weight, the last bite of food consumed must
have positive marginal utility at a consumer optimum.

2. What is true of the marginal utility per dollar spent on a stomach pacemaker compare with
the marginal utility per dollar of food consumed during that interval?
The marginal utility per dollar spent on a stomach pacemaker must equal to the marginal utility
per dollar of food consumed.

 Research Project
1. Learn about one example of a stomach pacemaker device in the Web Links in MyEconLab.
2. Read the Food and Drug Administration’s description of how a stomach pacemaker works in the
Web Links in MyEconLab.

 Appendix F—More Advanced Consumer Choice Theory

I. On Being Different: A difference curve is a curve composed of a set of consumption alternatives,
each of which yields the same total amount of satisfaction. (See Figure F-1.)
A. Properties of Indifference Curves:
1. Downward Slope: The indifference curve has a negative slope. (See Figure F-2.)
2. Curvature: The indifference curve is curved. (See Figure F-1.)
3. Imagining a Straight-Line Indifference Curve (See Figure F-2.)
4. Convexity of the Indifference Curve (See Figure F-1.)
B. The Marginal Rate of Substitution: The change in the quantity of one good that just offsets a
one-unit change in the consumption of another good, such that total satisfaction remains
constant. (See Table F-1.)
C. The Indifference Map: A set of indifference curves. (See Figure F-4.)

II. The Budget Constraint and the Consumer Optimum: The budget constraint includes all of the
possible combinations of goods that can be purchased (at fixed prices) with a specific budget.
A. Slope of the Budget Constraint: The budget constraint is a line that slopes downward from left
to right. (See Figure F-5.)
B. Consumer Optimum Revisited: Consumer optimum is the tangency point at which the
marginal rate of substitution is just equal to feasible rate of exchange between two goods.
(See Figure F-6.)

III. Deriving the Demand Curve: The demand curve can be derived by changing the price of one good,
so that the budget line rotates. (See Figure F-7.)

 Answers to Problems

20-1. The campus pizzeria sells a single pizza for $12. If you order a second pizza, however, the
pizzeria charges a price of only $5 for the additional pizza. Explain how an understanding
of marginal utility helps to explain the pizzeria’s pricing strategy.
 Chapter 20  Consumer Choice  299

The campus pizzeria indicates by its pricing policy that it recognizes the principle of diminishing
marginal utility. As shown in Figure 20-1 (substituting slices of pizza for apps), a customer’s
marginal utility for the second pizza is typically lower than for the first. Thus, the customer is
likely to value the second pizza less and, therefore, only be willing to pay less for it.

20-2. As an individual consumes more units of an item, the person eventually experiences
diminishing marginal utility. This means that to increase marginal utility, the person must
consume less of an item. Explain the logic of this behavior using the example in
Problem 20-1.

To raise marginal utility, an individual would consume fewer pizzas. As long as marginal utility
is positive, however, the individual’s total utility is rising with the second pizza even though
marginal utility is falling.

20-3. Where possible, complete the missing cells in the table below.

Marginal Marginal
Number of Total Utility of Utility of Bags of Total Utility of Utility of
Cheeseburgers Cheeseburgers Cheeseburgers French Fries French Fries French Fries
0 0 — 0 0 —
1 20 — 1 — 10
2 36 — 2 — 8
3 — 12 3 — 2
4 — 8 4 21 —
5 — 4 5 21 —

The total utility of the third, fourth, and fifth cheeseburgers is 48, 56, and 60, respectively. The
marginal utility of the first and second cheeseburgers is 20 and 16, respectively. The total utility
of the first, second, and third bags of French fries is 10, 18, and 20, respectively. The marginal
utility of the fourth and fifth bags of French fries is 1 and 0, respectively.

20-4. From the data in Problem 20-3, if the price of a cheeseburger is $2, the price of a bag of
French fries is $1, and you have $6 to spend (and you spend all of it), what is the utility-
maximizing combination of cheeseburgers and French fries?

The utility-maximizing combination of cheeseburgers and bags of French fries that equates
marginal utility per dollar spent and exhausts the total $6 budget is two cheeseburgers and two
bags of French fries. The individual purchases 2 cheeseburgers at $2 each, spends $4 on
cheeseburgers, and has a marginal utility per dollar spent equal to the ratio of 16 units of utility to
$2, or 8 units of utility per dollar. The individual buys 2 bags of French fries at $1 per bag, spends
$2 on cheeseburgers, and has a marginal utility per dollar spent equal to the ratio of 8 units of
utility to $1, or 8 units of utility per dollar. Thus, the individual equalizes marginal utility per
dollar spent at 8 units of utility per dollar and spends the available $6.

20-5. Return to Problem 20-4. Suppose that the price of cheeseburgers falls to $1. Determine the
new utility-maximizing combination of cheeseburgers and French fries.

The new utility-maximizing combination of bags of French fries and cheeseburgers that equates
marginal utility per dollar spent and exhausts the total $6 budget is four cheeseburgers and two
bags of French fries. The individual purchases 4 cheeseburgers at $1 each, spends $4 on
cheeseburgers, and has a marginal utility per dollar spent equal to the ratio of 8 units of utility to
300   Miller • Economics Today, Nineteenth Edition

$1, or 8 units of utility per dollar. The individual buys 2 bags of French fries at $1 per bag, spends
$2 on cheeseburgers, and has a marginal utility per dollar spent equal to the ratio of 8 units of
utility to $1, or 8 units of utility per dollar. Thus, the individual equalizes marginal utility per
dollar spent at 8 units of utility per dollar and spends the available $6.

20-6. Suppose that you observe that total utility rises as more of an item is consumed. What can
you say for certain about marginal utility? Can you say for sure that it is rising or falling or
that it is positive or negative?

When total utility is rising, the only thing we can say about marginal utility for certain is that it is
positive.

20-7. You determine that your daily consumption of soft drinks is 3 and your daily consumption
of tacos is 4 when the prices per unit are 50 cents and $1, respectively. Explain what
happens to your consumption bundle, and, after your consumption choices adjust, to the
marginal utility of soft drinks and the marginal utility of tacos, when the price of soft drinks
rises to 75 cents.

Other things being equal, when the price of soft drinks rises, the substitution effect comes into
play, and the individual tends to consume less of the more expensive item, soft drinks, and more
of the item with the unchanged price, tacos. Hence, the marginal utility of soft drinks rises, and
the marginal utility of tacos falls.

20-8. At a consumer optimum, for all goods purchased, marginal utility per dollar spent is
equalized. A high school student is deciding between attending Western State University
and Eastern State University. The student cannot attend both universities simultaneously.
Both are fine universities, but the reputation of Western is slightly higher, as is the tuition.
Use the rule of consumer optimum to explain how the student will go about deciding which
university to attend.
The student should compare the marginal utility per tuition dollar spent at the two Texas
universities. Assuming that a “unit” of college is a degree, a Texas high school student should
divide the additional satisfaction derived from a degree at each university by the total tuition it
would take to earn a degree at each institution. The university with the higher marginal utility per
tuition dollar is the one the student should attend.

20-9. Consider the movements that take place from one point to the next (A to B to C and so on)
along the total utility curve at the next column as the individual successively increases
consumption by one more unit, and answer the questions that follow.
a. Which one-unit increase in consumption from one point to the next along the total
utility curve generates the highest marginal utility?
 Chapter 20  Consumer Choice  301

b. Which one-unit increase in consumption from one point to the next along the total
utility curve generates zero marginal utility?
c. Which one-unit increase in consumption from one point to the next along the total
utility curve generates negative marginal utility?

a. Of all the possible one-unit increases in consumption displayed, the movement from point A
to point B generates the highest marginal utility. Total utility rises by 5 units between these
points, so the marginal utility of the first unit consumed is 5 units.
b. Between points E and F, a one-unit increase in the quantity consumed leaves total utility
unchanged at 11 units, so marginal utility is equal to zero.
c. Between points F and G, a one-unit increase in the quantity consumed causes total utility to
decline from 11 units to 10 units, so marginal utility is negative and equal to −1 unit.
20-10. Draw a marginal utility curve corresponding to the total utility curve depicted in
Problem 20-9.
302   Miller • Economics Today, Nineteenth Edition

20-11. Refer to the table below. If the subscription price for a sports app is $2 per week, the
subscription price of a game app is $1 per week, and a student has $9 per week to spend,
what quantities will she purchase at a consumer optimum?
Quantity of Sports Marginal Utility Quantity of Game Marginal Utility
Apps per week (utils) Apps per Week (utils)
1 1,200 1 1,700
2 1,000 2 1,400
3 800 3 1,100
4 600 4 800
5 400 5 500
6 100 6 200
For this consumer, at these prices the marginal utility per dollar spent on 2 sports apps is 500 units
of utility per dollar, and the marginal utility per dollar spent on 5 game apps is also 500 units of
utility per dollar. In addition, the entire budget of $9 is spent at this combination, which is the
consumer optimum.
20-12. Refer to the following table for a different consumer, and assume that each year this
consumer buys only annual subscriptions to economics statistics apps and subscriptions to
office productivity apps. The price of a subscription to each type of economics statistics app
is $2 per year, and the price of a subscription to each office productivity app is $60 per year.
If the consumer’s available income is $128 per year, what quantity of each item will the
individual purchase each week at a consumer optimum?
Quantity of Subscriptions Quantity of Subscriptions
to Economics Statistics Total Utility to Office Productivity Total Utility
Apps per Year (utils) Apps per Week (utils)
1 40 1 400
2 60 2 700
3 76 3 850
4 86 4 950
5 91 5 1,000
6 93 6 1,025

The table below displays the marginal utilities and the values of marginal utility per dollar spent
at a price of $2 per economic statistics app and a price of $60 per office productivity app. The
marginal utility per dollar spent is equalized at a value of 5, which yields a consumer optimum
of 4 economic statistics apps and 2 office productivity apps per week, for which the consumer’s
entire available income of $128 is spent. Note that the marginal utility per dollar spent is also
equalized at 2.50 if 5 economic statistics apps and 3 office productivity apps are consumed,
but the individual has insufficient income for this weekly consumption combination.
Quantity
Marginal of Marginal
Quantity of Utility per Baseball Utility
Hot Dogs per Total Marginal Dollar Games Total Marginal per Dollar
Week Utility Utility Spent per Week Utility Utility Spent
1 40 — — 1 400 — —
2 60 20 10 2 700 300 5
3 76 16 8 3 850 150 2.5
4 86 10 5 4 950 100 1.7
5 91 5 2.5 5 1000 50 0.8
6 93 2 1 6 1025 25 0.4
 Chapter 20  Consumer Choice  303

20-13. In Problem 20-12, if the consumer’s income rises to $190 per week, what new quantities
characterize the new consumer optimum?

The marginal utility per dollar spent is equalized at 2.50 if 5 economic statistics apps and
3 office productivity apps are consumed, and this consumption combination just exhausts the
now-available $190 in weekly income.

20-14. At a consumer optimum involving goods A and B, the marginal utility of good A is twice
the marginal utility of good B. The price of good B is $3.50. What is the price of good A?

The price of good A is twice the price of good B, or 2  $3.50 per unit  $7.00 per unit.

20-15. At a consumer optimum involving goods X and Y, the marginal utility of good X equals
3 utils. The price of good Y is three times the price of good X. What is the marginal utility of
good Y?

The marginal utility of good Y is three times the marginal utility of good X, or 3 × 3 utils
= 9 utils.

20-16. At a consumer optimum involving goods A and B, the marginal utility of good A is 2 utils,
and the marginal utility of good B is 8 utils. How much greater or smaller is the price of
good B compared with the price of good A?

Because the marginal utility of good B is four times greater than the marginal utility of good A,
at a consumer optimum the price of good B must be four times greater than the price of good A.

20-17. At a consumer optimum involving goods X and Y, the price of good X is $3 per unit, and the
price of good Y is $9 per unit. How much greater or smaller is the marginal utility of good
Y than the marginal utility of good X?

Because the price of good Y is three times greater than the price of good X, the marginal utility
of good Y must be three times greater than the price of good X.

20-18. The marginal utility that an individual would experience if she were to consume the first
unit of a digital app is 15 utils, and the marginal utility that she would experience if she
were to consume a second unit is 18 utils. If one app is the amount that the individual
decides to consume, what is the person’s total utility?

Consuming no digital apps would yield 0 units of total utility, so the fact that marginal utility
derived from the 1st unit is 15 utils implies that the total utility of consuming 1 unit is 15 utils.

20-19. Take a look at Figure 20-1. Suppose that the individual currently consumes 5 digital apps.
What happens to the person’s total utility if he were to reduce his consumption to 4 units?
Why does this fact imply that the marginal utility curve cuts through the horizontal axis of
panel (c) between the fourth and fifth app consumed?

As shown in the table in panel (a) and the graph in panel (b), reducing consumption from 4 apps to
5 leaves total utility unchanged at 20 utils. Hence, marginal utility between these two apps equals
0, which is the amount of marginal utility at the origin, which corresponds to the horizontal axis of
the graph in panel (c). Thus, the marginal utility curve crosses this axis between units 4 and 5.
304   Miller • Economics Today, Nineteenth Edition

20-20. Consider Figure 20-1. If this individual were to contemplate consuming a seventh digital
app and experience a total utility of 15 utils as a consequence, what would be the resulting
marginal utility? Would the points on the total utility and marginal utility graphs in panels
(a) and (b) lie higher and lower to the right of the current endpoints of those graphs?

The marginal utility would be 15 utils – 18 utils = -3 utils, so the person would experience even
more marginal disutility than for the 6th digital app consumed. The 15 utils in total utility for
7 apps would be lower than the 18 utils for 6 apps and the marginal utility of -3 for the 7 th app
would be lower than the -2 for the 6th app, so both new points would lie lower to the right on both
graphs in panels (a) and (b).

20-21. Take a look at Table 20-1. Suppose that the price of each digital app falls to $3.30. At the
same time, the price of each portable power bank increases to $5.37. Income remains
unchanged at $26. Rework the marginal-utility-per-dollars-spent columns and round each
amount to the nearest one-tenth. What are the quantities of digital apps and portable power
banks now purchased by this consumer?

As shown in the revised table that after redoing the columns, the marginal utility per dollars spent
is now equalized at 6.7 units of utility per dollar spent. The quantity of digital apps purchased is
3, and the quantity of portable power banks bought is 3.
Total and Marginal Utility from Consuming Digital Apps and Portable Power Banks on an Income
of $26
(1) (2) (3) (4) (5) (6) (7) (8)
Total
Marginal Utility of Marginal
Total Utility per Portable Utility per
Utility of Dollars Portabl Power Dollar
Digital Digital Marginal Spent e Power Banks Marginal Spent
Apps Apps per Utility (MUd /Pd) Banks per Utility (MUp /Pp)
per Period (utils) (price = per Period (utils) (price =
Period (utils) MUd $5.97) Period (utils) MUp $2.70)
0 0 – – 0 0 – –
1 50.0 50.0 8.4 1 25 25 9.3
2 95.0 45.0 5.0 2 47 22 8.1
3 135.0 40.0 6.7 3 65 18 6.7
4 171.5 36.5 7.8 4 80 15 5.6
5 200.0 28.5 8.6 5 89 9 3.3

20-22. At the optimal quantities of digital apps and portable power banks determined in your
answer to Problem 20-21, after rounding to the nearest 10 cents, is the $26 income all spent
at the new consumer optimum?

Spending on digital apps is now 3 apps times $5.97 per app, or $17.91, which rounded to the
nearest ten cents is $17.90. Spending on portable power banks equals 3 portable power banks
times $2.70, which equals $8.10. Total spending is $17.90 + $2.70 = $26, so all income is spent.
 Chapter 20  Consumer Choice  305

20-23. Consider figure 20-2, and suppose that the initial point is A. Explain why a decrease in the price
of each digital app from $5 to $4 results in a change in the marginal utilities of digital apps in a
direction that is consistent with re-attainment of a new consumer optimum at point B.

At A, the marginal utility per dollar spent on apps was equalized with the marginal utility per
dollar spent on any other item. When the price of apps falls, the marginal utility per dollar spent
on apps rises. The rise in the quantity of app demanded causes the marginal utility of apps to
drop, which pushes the marginal utility per dollar spent on apps back up toward consistency with
a consumer optimum at B.

Appendix F

F-1. Consider the indifference curve illustrated in Figure F-1. Explain, in economic terms, why
the curve is convex to the origin.

The indifference curve is convex to the origin because of a diminishing marginal rate of
substitution. As an individual consumes more and more of an item, the less the individual is
willing to forgo of the other item. The diminishing marginal rate of substitution is due to
diminishing marginal utility.

F-2. Your classmate tells you that he is indifferent between three soft drinks and two
hamburgers or two soft drinks and three hamburgers.
a. Draw a rough diagram of an indifference curve containing your classmate’s
consumption choices.
b. Suppose that your classmate states that he is also indifferent between two soft drinks
and three hamburgers or one soft drink and four hamburgers, but that he prefers three
soft drinks and two hamburgers to one soft drink and four hamburgers. Use your
diagram from part (a) to reason out whether he can have these preferences.
a. The indifference curve appears in the figure.
306   Miller • Economics Today, Nineteenth Edition

b. Your classmate cannot possibly have this set of preferences, because as stated the indifference
curves intersect.

F-3. The table below represents Sue’s preferences for bottled water and soft drinks, the
combination of which yields the same level of utility.

Combination of Bottled Bottled Water per Soft Drinks per

Water and Soft Drinks Month Month
A 5 11
B 10 7
C 15 4
D 20 2
E 25 1

Calculate Sue’s marginal rate of substitution of soft drinks for bottled water at each rate of
consumption of water (or soft drinks). Relate the marginal rate of substitution to marginal
utility.
Sue’s marginal rate of substitution is calculated below:

Combination of Bottled Bottled Water per Soft Drinks per

Water and Soft Drinks Month Month MRS
A 5 11
B 10 7 5:4
C 15 4 5:3
D 20 2 5:2
E 25 1 5:1

The diminishing marginal rate of substitution of soft drinks for water shows Sue’s diminishing
marginal utility of bottled water. She is willing to forgo fewer and fewer soft drinks to get an
additional five bottles of water.

F-4. Using the information provided in Problem F-3, illustrate Sue’s indifference curve, with
water on the horizontal axis and soft drinks on the vertical axis.
 Chapter 20  Consumer Choice  307

Plotting points A through E yields Sue’s convex indifference curve, along which she obtains
equal utility from the alternative combinations of bottled water and soft drinks

F-5. Sue’s monthly budget for bottled water and soft drinks is $23. The price of bottled water is
$1 per bottle, and the price of soft drinks is $2 per bottle. Calculate the slope of Sue’s
budget constraint. Given this information and the information provided in Problem F-3,
find the combination of goods that satisfies Sue’s utility maximization problem in light of
her budget constraint.

Given that water is measured along the horizontal axis and soft drinks are measured along the
vertical axis, the slope of Sue’s budget constraint is the price of water divided by the price of soft
drinks, or PW/PS = $1 per bottle of water/$2 per unit of soft drinks. The only combination of bottled
water and soft drinks that is on Sue’s indifference curve and budget constraint is combination C, at
which total expenditures on water and soft drinks equal (15 × $1) + (4 × $2) = $15 + $8 = $23.

F-6. Using the indifference curve diagram you constructed in Problem F-4, add in Sue’s budget
constraint using the information in Problem F-5. Illustrate the utility-maximizing
combination of bottled water and soft drinks.

As shown in the figure, the utility-maximizing combination C is the point at the indifference curve is
just tangent to the budget constraint. At this point, Sue has allocated her consumption of bottled water
and soft drinks consistent with attaining the maximum feasible utility given her available budget
308   Miller • Economics Today, Nineteenth Edition

F-7. Suppose that at a higher satisfaction level than in Problem F-3, Sue’s constant-utility
preferences are as shown in the table below. Calculate the slope of Sue’s new budget
constraint using the information provided in Problem F-5. Supposing now that the
price of a soft drink falls to $1, find the combination of goods that satisfies Sue’s
utility maximization problem in light of her budget constraint.
Combination of Bottled
Water and Soft Drinks Bottled Water per Month Soft Drinks per Month
A 5 22
B 10 14
C 15 8
D 20 4
E 25 2

With the quantity of bottled water measured along the horizontal axis and the quantity of soft
drinks measured along the vertical axis, the slope of Sue’s budget constraint is the price of water
divided by the price of soft drinks. This ratio equals ½. The only combination of bottled water
and soft drinks that is on Sue’s indifference curve and budget constraint is combination C, where
expenditures on water and soft drinks total $23.

F-8. Illustrate Sue’s new budget constraint and indifference curve in a diagram from the data in
Problem F-3. Illustrate also the utility-maximizing combination of goods.

As shown in the figure, when the price of soft drinks drops to $1, the slope of the budget
constraint changes to $1 per bottle of water/$1 per unit of soft drink = 1. Hence, the budget
constraint rotates outward, and Sue can reach a new point of consumer optimum at the point
where the higher indifference curve is tangent to the new budget constraint

F-9. Given your answers to Problems F-5 and F-7, are Sue’s preferences for soft drinks
consistent with the law of demand?

Yes, Sue’s revealed preferences indicate that her demand for soft drinks obeys the law of
demand. When the price of soft drinks declines from $2 to $1, her quantity demanded rises from
4 to 8.
 Chapter 20  Consumer Choice  309

F-10. Using your answer to Problem F-8, draw Sue’s demand curve for soft drinks.

In the figure, the two price combinations from Problem F-9 have been drawn, and these two
points lie along the demand curve.

 Selected References
Ferguson, C.W., “Substitution Effect in Value Theory: A Pedagogical Note,” Southern Economic
Journal, Vol. XXVI, 1960, pp. 310–314.
Fisher, Irving, “Is ‘Utility’ the Most Suitable Term for the Concept It Is Used to Denote?” American
Economic Review, Vol. 8, June 1918, pp. 335–337.
Knight, F.H., “Realism and Relevance in the Theory of Demand,” Journal of Political Economy,
Vol. 52, 1944, pp. 289–318.
Leftwich, Richard H., The Price System and Resource Allocation, 7th ed., Chicago, IL: Dryden Press,
1979, Chapter 5.
Miller, Roger L. and Roger Meiners, Intermediate Microeconomics: Theory, Issues, and Applications,
4th ed., New York: McGraw-Hill, 1987.
Stigler, C.J., “The Development of Utility Theory,” Journal of Political Economy, Vol. 58
August/October 1950, pp. 307–327.
Vincer, Jacob, “The Utility Concept in Value Theory and Its Critics,” Journal of Political Economy,
Vol. 33, August 1925, pp. 369–387.