Asked by Camila Almeida on Jun 05, 2024
Verified
A consumer currently spends a given budget on two goods, X and Y, in such quantities that the marginal utility of X is 10 and the marginal utility of Y is 8. The unit price of X is $5 and the unit price of Y is $2. The utility-maximizing rule suggests that this consumer should
A) increase consumption of product X and decrease consumption of product Y.
B) increase consumption of product X and increase consumption of product Y.
C) increase consumption of product Y and decrease consumption of product X.
D) stick with the current consumption mix because it yields maximum utility.
Marginal Utility
Extra pleasure or advantage gained by consuming one more unit of a good or service.
Utility Maximizing
The economic principle where consumers allocate their resources to maximize their overall satisfaction or utility.
Consumption Mix
Refers to the combination of goods and services consumed by an individual or within an economy.
- Exercise the idea of the ratio between marginal utility and price for the maximal benefit.
- Acquire an understanding of how financial constraints shape the choices of consumers.
Verified Answer
MM
Madison McguirtJun 06, 2024
Final Answer :
C
Explanation :
The utility-maximizing rule states that for a consumer to achieve maximum utility, the ratio of the marginal utility to the price of each good should be equal across all goods. In this case, MUx/Px = 10/5 = 2 and MUy/Py = 8/2 = 4. Since the ratio for Y is higher, the consumer should increase consumption of Y and decrease consumption of X to equalize these ratios.
Learning Objectives
- Exercise the idea of the ratio between marginal utility and price for the maximal benefit.
- Acquire an understanding of how financial constraints shape the choices of consumers.
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