Jeremy is deeply in love with Jasmine
 Description
Description
Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the landline phone for five cents per minute or he can drive to see her, at a roundtrip cost of $2 in gasoline money. He has a total of $10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilitometer that measures his total utility from personal visits and from phone minutes
Round Trips  Total Utility  Phone minutes  Total utility 
0  0  0  0 
1  120  20  200 
2  180  40  380 
3  230  60  540 
4  270  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 
Jeremy is deeply in love with Jasmine
 Using the values given in the table above and the marginal utility approach, determine the choice of phone minutes and round trips that maximize Jeremy’s utility given his budget.
Find total utility in order to solve for marginal utility, the table doesn’t represent actual choice available for the budget. If Jeremy has only $10 to spend and a round trip costs $2 and phone calls cost $0.05 per minute, he could spend his entire budget on five round trips but no phone calls or 200 minutes of phone calls, but no round trips or any combination of the two in between. It is easy to see all of his budget options with a little algebra. The equation for a budget line is:
Budget=PRT×QRT+PPC×QPC
Where P and Q are price and quantity of round trips (RT) and phone calls (PC) (per minute). In Jeremy’s case the equation for the budget line is:Jeremy is deeply in love with Jasmine
$10=$2×QRT+$0.05×QPC
$10/$0.05= ($2QRT+$0.05QPC)/$0.05
200=40QRT+QPC
QPC=200−40QRT
Choose zero through five round trips (column 1), the table below shows how many phone minutes can be afforded with the budget (column 3). The total utility figures are given in the table below.
Round trips  Total utility for trips  Phone minutes  Total utility for minutes  Total utility 
0  0  200  1100  1100 
1  80  160  1040  1120 
2  150  120  900  1050 
3  210  80  680  890 
4  260  40  380  640 
5  300  0  0  300 
Marginal utility is equal to the change in total utility divided by the change in trips or minutes.
Jeremy is deeply in love with Jasmine
Round trips  Total utility for trips  Marginal utility(per trip)  Phone minutes  Total utility for minutes  Total utility  Marginal utility(per minute) 
0  0  0  200  1100  1100  – 
1  80  80  160  1040  1120  60/40=1.5 
2  150  70  120  900  1050  140/40=3.5 
3  210  60  80  680  890  220/40=5.5 
4  260  50  40  380  640  300/40=7.5 
5  300  40  0  0  300  380/40=9.5 
Note that it is impossible to directly compare marginal utilities, since the units are trips versus phone minutes. There is need of a common denominator for comparison, which is price. Dividing MU by the price, yields columns 4 and 8 in the table below.
Round trips  Total utility for trips  Marginal utility (per trip)  MU/P  Phone minutes  Total utility for minutes  Total utility  Marginal utility(per minute)  MU/P 
0  0  0  –  200  1100  1100  –  1.5/$0.005=30 
1  80  80  80/$2=40  160  040  1120  1.5  3.5/$0.05 = 70 
2  150  70  70/$2=35  120  900  1050  3.5  5.5/$0.05 = 110 
3  210  60  60/$2=30  80  680  890  5.5  7.5/$0.05 = 150 
4  260  50  50/$2=25  40  380  640  7.5  9.5/$0.05 = 190 
5  300  40  40/$2=20  0  0  300  9.5  – 
Start at the bottom of the table where the combination of round trips and phone minutes is (5, 0). This starting point is arbitrary, but the numbers in this example work best starting from the bottom. Suppose we consider moving to the next point up. At (4, 40), the marginal utility per dollar spent on a round trip is 25. The marginal utility per dollar spent on phone minutes is 190.Since 25<190, we are getting much more utility per dollar spent on phone minutes, so let’s choose more of those. At (3, 80), MU/PRT is 30<150 (the MU/PM), but notice that the difference is narrowing. We keep trading round trips for phone minutes until we get to (1,160), which is the best we can do. The MU/P comparison is as close as it is going to get (40vs.70). Often in the real world, it is not possible to get MU/P exactly equal for both products, so you get as close as you can. Jeremy is deeply in love with Jasmine
Quantity  Fixed cost  Variable cost  Total cost  Average Variable
Cost

Average total cost  Marginal cost 
0  $30  0  
1  $10  
2  $25  
3  $45  
4  $70  
5  $100  
6  $135 
The above table represents a Ski Company. They sell pairs of skis. Use the information provided to answer the following 8 questions.
 What is the fixed cost of producing 2 pairs of skis?
Fixed cost remains constant regardless of the quantity of production.
Fixed cost= $30
 What is the total cost of producing 4 pairs of skis?
Total cost= fixed cost + variable cost
Total cost=$30+$70= $100
 What is the average variable cost of producing 5 skis?
Average variable cost= total variable cost/ total output
Average variable cost = $100/5= $20
 What is the marginal cost of producing the 6^{th} pair of skis?
Marginal cost = change in total cost/ change in quantity
Change in total cost=total cost for 6 skis – total cost for 5 skis
Total cost for 6 skis= $135+$30=$165
Total cost for 5 skis=$100+$30=$130
Change in total cost=$165$130= $35
Change in quantity = 65= 1
Marginal cost= $35/1=$35
Assume this firm is perfectly competitive.
 If the price of a pair of skis was $20, how many pairs of skis will they choose to produce?
He will choose to produce 3 pairs of skis because he will incur the least amount of loss.
 What will be their profit or loss?
Loss/ profit = revenue – total cost
Revenue = $20*3= $60
Total cost= $30+$45= $75
Loss=$60$75=$15
 If the price of skis were $30 a pair, what quantity would they produce?
He will produce 5 pairs of skis because he will incur the at most profit.
 What will be their profit or loss?
Loss/ profit = revenue – total cost
Revenue =5*$30=$150
Total cost =$30+$100=$130
Profit =$150$130=$20
The chart above represents the costs in the shortrun and longrun for a firm. Use it to answer the following 4 questions.
 What do economists call the phenomenon occurring with the LRATC curve from 1,000 to 3,000 units of output?
Economies of scale; cost goes down as output increases.
 What do economists call the phenomenon occurring with the LRATC curve from 3,000 to 5,000 units of output?
Diseconomies of scale; cost goes up as output increases
 If this firm needed to produce 1,500 units of output, which SRATC curve will they choose?
SR ATC 1
 If this firm needed to produce 2,800 units of output, which SRATC curve will they choose?
SR ATC 3