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Suppose that Michael stops by a hamburger restaurant, Five Men, to have lunch
Suppose that Michael stops by a hamburger restaurant, Five Men, to have lunch. He feels that the benefit from the first hamburger is worth $8.50, the benefit from the second one is worth $6.00, the benefit from the third one is worth $4.25, and the benefit from the fourth one is worth $3.00. The first hamburger costs him $3.00, the second one $3.50, the third one $4.00, and the fourth one $4.50.
(a) Calculate total benefit (TB), total cost (TC), and net benefits (NB) at each level of his hamburger consumption.
(b) Determine his optimal hamburger consumption and show if his optimal hamburger consumption maximizes NB.
(c) Obtain marginal benefit (MB) and marginal cost (MC) of each hamburger, and confirm your answer to part (b) by comparing MB and MC at each hamburger.
Expert Solution
| Hamburger Level | MB | MC | TB | TC | NB |
|---|---|---|---|---|---|
| 1 | 8.5 | 3 | 8.5 | 3 | 5.5 |
| 2 | 6 | 3.5 | 14.5 | 6.5 | 8 |
| 3 | 4.25 | 4 | 18.75 | 10.5 | 8.25 |
| 4 | 3 | 4.5 | 21.75 | 15 | 6.75 |
We are given Marginal benefits (MB) and Marginal cost (MC) in the problem. The problem lists how much each additional burger benefits and costs Michael. These are the values for MB and MC in the table above (column 2 and 3).
a. Total benefit (TB) and Total cost (TC) are the sum of marginal benefit and cost up to that point respectively (column 4 and 5).
Net Benefit (NB) is TB minus TC (column 6)
b. Since NB = 8.25 is the largest, his consumption is optimal at 3 hamburgers.
c. The optimal consumption can be verified by MC and MB. Since Michael should increase consumption as long as MB is greater than MC and this happens until a consumption level of 3 hamburgers when MB is 4.24 and MC is 4.
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