Answer to Question #34575 in Macroeconomics for kandra

Question

Potatoes cost Janice 1.00 USD per pound, and she has 6.00 USD that she could possibly spend on potatoes or other items. If she feels that the first pound of potatoes is worth 1.50 USD, the second pound is worth 1.14 USD, the third pound is worth 1.05 USD, and all subsequent pounds are worth 0.30 USD, how many pounds of potatoes will she purchase? What if she only had 3.00 USD to spend?

Answer 1

Janice will buy potatoes when it's worth more than it costs. So she will purchase those potatoes whose price is less than her Willingness To Pay. Her willingness to pay is what she feels the pound of potatoes is "worth". So the worth of the first, second and the third pounds exceed the cost of potato (1.50 USD, 1.14 USD, 1.05 USD > 1.00 USD), If all remaining pounds are worth 0.30 USD then Janice will not purchase these because the value is less than the cost. (0.30 USD < 1.00 USD). So Janice will spend 3.00 USD on 3 pounds of potatoes. If she only has 3.00 USD, then she’ll spend it all on potatoes and buy 3 pounds of potatoes.