Microeconomics Question - What can I be missing

[slayer202]

I'll start by saying I am not looking for my work to be done for me, I just need a push in the right direction. I have a question for a mid-level microeconomics course I am taking and am trying to figure out what the teacher might be looking for in an answer for extra credit. He is very picky and said he would be surprised if someone got full credit for the problem.

Julie buys coffee for $1 per cup and tea for $0.50 per cup. Every day she drinks 1 cup of coffee and 2 cups of tea. Tom buys coffee for $0.50 per cup and tea for $1 per cup. Every day he drinks 2 cups of coffee and 1 cup of tea. Can you determine whether Julie and Tom have identical tastes?

I am going through some basic stuff with marginal rates of substitution, drawing out budget contraints/indifference curves, but I feel like there is some "key" answer the teacher is looking for. Again, I don't want someone to do all my work for me, but if anyone has any suggestions or ideas I would appreciate it. I've looked through my textbook and a bit on google but haven't found anything that stands out. Question seems really vague, and he is going to want a lot of explanation, so a yes or no won't do

 

[Slew Foot]

They both like caffiene but are very cheap?

 

[slayer202]

Originally posted by: Slew Foot
They both like caffiene but are very cheap?

:beer:

 

[TuxDave]

So I agree with starting off with budget curves but I guess "identical tastes" means they have identical utility curves. So their choices are assuming they maximized their utility given a budget constraint. And so at the point of their choice, they utility curve should be tangent to the budget constraint curve right? hmmm....

 

[slayer202]

Originally posted by: TuxDave
So I agree with starting off with budget curves but I guess "identical tastes" means they have identical utility curves. So their choices are assuming they maximized their utility given a budget constraint. And so at the point of their choice, they utility curve should be tangent to the budget constraint curve right? hmmm....

Right. But the difference in prices they pay is throwing me off. Are they in different markets or what? I'm not sure where to go with this

 

[sactoking]

Yes, I believe the prof. is wanting you to examine the utility involved. There should be some sort of substitution 'frontier'. Look at that in relation to what you know about their utility.

 

[Fern]

Can you determine whether Julie and Tom have identical tastes?

My amatuer informal answer is that they do not.

Julie values coffee above tea, as she pays $1 for it. If she preferred tea, which costs half as much, she wouldn't buy the coffee (at twice as much).

Vice versa for Tom.

But really my advice to Julie is buy coffee at Tom's place, and he should buy tea at her place.



Fern

 

[sponge008]

Apparently they're in different markets. One possibility is that they both like coffee and tea equally well, and want three non-identical caffeinated drinks a day. However, you could also have a situation where they want that specific amount of each drink and don't really care about the price to the degree it's at, so you can't tell whether they have identical tastes.

 

[TuxDave]

Originally posted by: slayer202

Originally posted by: TuxDave
So I agree with starting off with budget curves but I guess "identical tastes" means they have identical utility curves. So their choices are assuming they maximized their utility given a budget constraint. And so at the point of their choice, they utility curve should be tangent to the budget constraint curve right? hmmm....

Right. But the difference in prices they pay is throwing me off. Are they in different markets or what? I'm not sure where to go with this

I think it's also assumed that they are in different markets and are unable to change their market. That's why they're forced to pay the different prices for each cup of tea or coffee. I'm personally biasing towards no as the answer.

 

[Safeway]

What is the use of the word cup is changing with each use.

One 8-oz cup of tea or an actual 16-oz cup of tea? The word is flip-flopping between these two definitions!

 

[sactoking]

Markets would be somewhat irrelevant, since you are asked about 'tastes'. From a slightly less theoretical standpoint, when would their tastes be the same? When the indifference/utility intersection for both people is equal relative to the availability of the products.

I'm trying not to give too much away (from what I've figured out of the situation), but imagine if coffee and tea gave both people one Util. Each day Julie gets 1 Util from coffee and 2 from tea for a total of 3 Utils. But if that's the case, she'd rather buy 6 cups of tea, ceterus paribus, and get 6 Utils.

Each day Tom gets 2 Utils from coffee and 1 Util from tea. Ceterus Paribus, he should buy 6 cups of coffee. So, obviously they do not value tea and coffee the same. Julie must be getting 2 Utils from coffee to equal her enjoyment from 2 cups of tea. Tom must get 2 Utils from tea to equal his 2 cups of coffee. Infer that they do not have the same tastes.

That's how I'd view the problem from what was given.

 

[slayer202]

Originally posted by: Fern
My amatuer informal answer is that they do not.

Julie values coffee above tea, as she pays $1 for it. If she preferred tea, which costs half as much, she wouldn't buy the coffee (at twice as much).

Vice versa for Tom.

well I don't think there is necessarily a preference, only a difference in cost which determines value. If that is the case, I am not really sure what exactly "identical tastes" mean.

I figure that if for either person, if the prices changed to what the other person pays for their drinks, then they would both buy the same amount of each drink?

interesting sacto, but I am thinking that they both want at least some of each drink, and there is some diminishing return

 

[sactoking]

Ahh, you're on the right track. I was using the 6 cups example to illustrate why they are observed buying some of both drinks. There HAS to be a personal preference to one over the other for each Tom and Julie. You can't do any more than hypothesize about supply, preference, or diminishing returns based on the info given. But you can state that each person does not view coffee and tea as substitutes. If they were viewed as substitutes, then the 6-cup example would be true based on market pricing.

 

[Caecus Veritas]

Julie buys coffee for $1 per cup and tea for $0.50 per cup. Every day she drinks 1 cup of coffee and 2 cups of tea. Tom buys coffee for $0.50 per cup and tea for $1 per cup. Every day he drinks 2 cups of coffee and 1 cup of tea. Can you determine whether Julie and Tom have identical tastes?

Perhaps your professor is looking for the "missing" components needed to determine whether they have identical tastes. I would create the equations/graphs needed to find whether they have identical tastes and figure out which information I'm missing. And then I would answer the question as no and proceed to explain why.

 

[TuxDave]

Originally posted by: sactoking
Ahh, you're on the right track. I was using the 6 cups example to illustrate why they are observed buying some of both drinks. There HAS to be a personal preference to one over the other for each Tom and Julie. You can't do any more than hypothesize about supply, preference, or diminishing returns based on the info given. But you can state that each person does not view coffee and tea as substitutes. If they were viewed as substitutes, then the 6-cup example would be true based on market pricing.

They may not be equal substitutes but they do act as substitutes. It's obvious from the question that Julie would value 1 coffee and 2 teas over 4 teas. So if given 4 teas, she would gladly substitute 2 of those teas to get a coffee. However you have a diminishing return on coffee (and of course the increasing marginal utility of tea as you reduce the number she has) and so she wouldn't substitute another 2 teas to get that coffee.

The reason why I am biasing towards no for the answer because there are multiple solutions on their utility function. You can create one that satisfies both and at the same time two different functions that satisfy each one independently. You can show it graphically or mathematically.