The meal plan at University A lets students eat as much as they like for a fixed fee of €500 per semester. The average student there eats 250 kg of food per semester. University B charges students €500 for a book of meal tickets that entitles the student to eat 250 kg of food per semester. If the student eats more than 250 kg, he or she pays extra; if the student eats less, he or she gets a refund. If students are rational, at which university will average food consumption be higher?

University A

Explanation:

Marginal cost is the cost borne when an additional unit of output is produced. Sunk cost is the cost which once incurred cannot be recovered.

The marginal cost at university A is $0 because they don't have to pay anything over and above $500. This $500 is the sunk cost for students at university A.

The marginal cost at university B is $2 because they can consume only 250 pounds of food, making them careful about the quantity of food they eat. Sunk cost is not considered while making a decision, so the marginal cost at university A is $0 and that in university B $2.

Therefore, concluding that the average consumption is higher in university A

Average consumption will be higher at University A

Explanation:

In the given situation the fee of €500 will cater for food for the semester in University A. There is no limit stated but the average student eats 250kg.

This implies that there will be students that eat higher than 250kg here.

Since there is no limit to what they can eat, they eat as much as possible to maximise satisfaction.

In University B on the other hand there is maximum of 250kg covered by the fee of €500.

The average amount of food eaten will be below 250kg as all students eat either at or below the maximum amount