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Author Question: Suppose that Alyssa spends all her income on video games and DVDs and her marginal utility per ... (Read 123 times)

Jkov05

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on: Jun 29, 2018
Suppose that Alyssa spends all her income on video games and DVDs and her marginal utility per dollar from video games equals that from DVDs. Is Alyssa maximizing her utility? Now, suppose that the price of a DVD falls.
 
  Should Alyssa change the combination of goods she consumes? If yes, how? Explain.

Question 2

When a perfectly competitive market is in its long-run equilibrium, the fact that the firms make zero economic profit will
 
  A) encourage new firms to enter the market.
  B) cause existing firms to shut down.
  C) cause existing firms to leave the market.
  D) mean that the firms' owners earn a normal return.


lolol

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Reply #1 on: Jun 29, 2018
Answer to Question 1

If Alyssa spends all her income on video games and DVDs and her marginal utility per dollar from video games equals that from DVDs, both utility maximization conditions are met and therefore Alyssa maximizes her utility. If the price of a DVD falls, Alyssa's marginal utility per dollar from DVDs becomes greater than that from video games. Therefore, if she spends a dollar more on DVDs and a dollar less on video games, her utility gain from the increased consumption of DVDs will be greater than her utility loss from the decreased consumption of video games and hence her total utility increases. So, to maximize her utility, Alyssa should increase her consumption of DVDs and decrease her consumption of video games.

Answer to Question 2

D


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