Calculate Utility & Marginal Utility: Taco Price & Value

Subject : Business

Question: During her lunch break, Michelle heads to a nearby food truck selling tacos. Each taco only costs $2 each, but she’s so hungry, she’s willing to pay $5 each. Even though the tacos are only worth $2 each, she places a utility worth of $5. During her stay at the truck, she wants to eat two tacos. Knowing she’ll be almost full after the first taco, she’s only willing to pay $3 for the second taco, placing a lower utility upon it.

a) Find her total utility, she adds both totals together.

b) On a separate visit to the food truck, she’s willing to eat 5 tacos. After paying $5 for the first taco, she decides the second taco is only worth $4 because she’s filling up. After the second taco, she would only pay $1 each for the remaining 3 tacos. Find her total utility in the second visit, she adds all purchases together?

c) Find marginal utility between both visits.

Expert Verified Solution:

Let’s calculate Michelle’s total utility and marginal utility step by step:

a) Total Utility for the First Visit

Michelle’s willingness to pay for each taco represents her utility for that taco. Her total utility for the first visit can be calculated by summing the utility she places on each taco.

First Taco: She is willing to pay $5 for the first taco but the actual price is $2.

Utility for the first taco: $5 – $2 = $3

Second Taco: She is willing to pay $3 for the second taco but the actual price is $2.

Utility for the second taco: $3 – $2 = $1

Total Utility for the first visit: 3 + 1 = $4

b) Total Utility for the Second Visit

First Taco: She is willing to pay $5.

Utility for the first taco: $5 – $2 = $3

Second Taco: She is willing to pay $4.

Utility for the second taco: $4 – $2 = $2

Third Taco: She is willing to pay $1.

Utility for the third taco: $1 – $2 = -$1 (Note: This is a negative utility because she values it less than the price.)

Fourth Taco: She is willing to pay $1.

Utility for the fourth taco: $1 – $2 = -$1

Fifth Taco: She is willing to pay $1.

Utility for the fifth taco: $1 – $2 = -$1

Total Utility for the second visit: 3 + 2 – 1 – 1 – 1 = $2

c) Marginal Utility Between Visits

Marginal utility refers to the change in total utility when an additional unit is consumed. To find the marginal utility between the two visits, we need to calculate the difference in total utility between the two visits:

Total utility for the first visit: $4

Total utility for the second visit: $2

Marginal Utility between visits: 2 – 4 = -$2

The marginal utility between the two visits is -$2, indicating that her total utility decreased by $2 when comparing her second visit to her first visit.