|
5. After we
compensate Fred by the amount we calculated in the previous questions, his new
consumption of beer and brats will be:
We found that we need to compensate Fred by increasing his income by $6 bringing it to $18. Under these circumstances, with beer and brats both costing $2 each, we need to find a bundle that costs exactly $18 and for which the marginal utilities of beer and brats are equal. The MU of beer when he consumes 4 is 8, and the MU of brats when he consumes 5 brats is also 8, and the bundle of 5 brats and 4 beers costs exactly $18.
|
| Fred's Marginal Utility |
| Q |
MU Brats |
MU Beer |
| 1 |
16 |
11 |
| 2 |
14 |
10 |
| 3 |
12 |
9 |
| 4 |
10 |
8 |
| 5 |
8 |
7 |
| 6 |
6 |
6 |
| 7 |
4 |
5 |
| 8 |
2 |
4 |
|
