In 2021, Kante, a typical consumer, goes into a super market in central London, where he has four cups of coffee from the coffee shop section. A) Explain what we might observe about the total utility and marginal utility of the individual. I. How doe

### A) Total Utility and Marginal Utility **Total Utility:** Total utility refers to the total satisfaction or pleasure derived from consuming a certain quantity of goods or services. Each cup of coffee Kante drinks contributes to his total utility, which increases as he consumes more cups. **Marginal Utility:** Marginal utility refers to the additional satisfaction or utility derived from consuming one more unit of a good. For Kante, the first few cups of coffee likely provide high levels of marginal utility. However, as he continues to consume more cups, the satisfaction he gets from each additional cup tends to decrease. **Law of Diminishing Returns:** The concept of diminishing marginal utility means that as Kante consumes more cups of coffee, the incremental satisfaction (marginal utility) he receives from each additional cup will decrease. For example: - The first cup may give him a utility of 10. - The second cup might give him a utility of 8. - The third cup might give him a utility of 5. - The fourth cup might give him a utility of 2. This illustrates the law of diminishing returns: while total utility increases as Kante consumes more coffee, the rate at which he gains additional satisfaction from each cup decreases. --- ### B) Kante’s Budget Constraint Kante has €100 to spend on orange juice (€2 per carton) and yoghurt (€4 per tub). To construct his budget constraint, we find out how much of each good he could buy with his budget: - If he spends all his money on orange juice: - \( \frac{100}{2} = 50 \) cartons of orange juice. - If he spends all his money on yoghurt: - \( \frac{100}{4} = 25 \) tubs of yoghurt. Now, we can draw his budget constraint with orange juice on the x-axis and yoghurt on the y-axis: - The x-intercept is 50 (when Kante buys no yoghurt). - The y-intercept is 25 (when Kante buys no orange juice). The budget constraint will be a straight line connecting these two intercepts. --- ### C) New Budget Constraint After Price and Salary Increase If all prices increase by 10%, the new prices will be: - Orange juice: \( 2 \times 1.10 = €2.20 \) per carton. - Yoghurt: \( 4 \times 1.10 = €4.40 \) per tub. Kante’s new salary after a 10% increase will be: - \( 100 \times 1.10 = €110 \). Now, Kante’s budget constraint can be recalculated: - If he spends all his money on orange juice: - \( \frac{110}{2.20} = 50 \) cartons of orange juice. - If spends all his money on yoghurt: - \( \frac{110}{4.40} = 25 \) tubs of yoghurt. However, notice that the number of goods he can buy has changed due to the price increase. - The y-intercept will now be \( 110/2.20 \approx 25 \) (tubs of yoghurt when no orange juice is bought). - The x-intercept will now be \( 110/4.40 \approx 25 \) (cartons of orange juice when no yoghurt is bought). --- ### D) Explanation of the New Budget Constraint The new budget constraint reflects that both prices and Kante's income have increased by the same percentage (10%). Despite the increase in monetary income, the increase in prices leads to Kante being able to purchase the same amounts (or fewer) of goods as he could before the increase. - **Shift of the Budget Constraint:** The budget line shifts inward because the new prices increase the cost of obtaining either good. Kante's purchasing power with respect to real goods is effectively reduced despite his nominal income increase. - **Implications of the Shift:** Although Kante has more money nominally, he cannot afford to buy more quantities of orange juice or yoghurt than before, given the price increase. This indicates that the real income or purchasing power has not increased and may lead Kante to reassess his consumption choices, possibly opting for fewer goods or cheaper substitutes. In graphical terms, the budget line would slope downwards from left to right, but would clearly indicate that Kante can purchase less of both goods than he could on his original budget constraint. Thus, the consumer’s real affordability is constricted, reflecting the concept of inflation affecting consumer choices.