Answer to Question #138131 in Microeconomics for christopher B jones

Question

Suppose that Omar’s marginal utility for cups of coffee is constant at 5.5 utils per cup no matter how many cups he drinks. In contrast, his marginal utility per doughnut is 11 for the first doughnut he eats, 10 for the second, 9 for the third, and so on (that is, declining by 1 util per additional doughnut). In addition, suppose that coffee costs $1 per cup, doughnuts cost $1 each, and Omar has a budget that he can spend only on doughnuts, coffee, or both.



How big would that budget have to be before he will spend a dollar buying a first cup of coffee?

Answer 1

Omar will buying doughnuts until its utility does not decrease to 5. That is 6 doughnuts, so he needs 6 dollars