Asked by Katrina Kazandjian on May 04, 2024
Verified
A consumer is making purchases of products Alpha and Beta such that the marginal utility of product Alpha is 30 and the marginal utility of product Beta is 40. The price of product Alpha is $5, and the price of product Beta is $10. The utility-maximizing rule suggests that, to stay within a given budget constraint, this consumer should
A) increase consumption of product Beta and decrease consumption of product Alpha.
B) increase consumption of product Beta and increase consumption of product Alpha.
C) increase consumption of product Alpha and decrease consumption of product Beta.
D) make no change in the consumption of Alpha or Beta.
Marginal Utility
The extra pleasure or benefit gained by a consumer from consuming one more unit of a product or service.
Utility Maximizing Rule
A principle in economics stating that to maximize satisfaction or utility, consumers allocate their expenditures so that the last unit of currency spent on each product provides the same level of marginal utility.
Budget Constraint
The limitation on the purchasing ability of a consumer based on available income and prices.
- Comprehend the concept of maximizing utility for consumers.
- Engage the principle of marginal utility compared to price for maximum utility achievement.
Verified Answer
MB
Maame BonneyMay 08, 2024
Final Answer :
C
Explanation :
The utility-maximizing rule states that consumers should allocate their budget in a way that the last dollar spent on each good provides the same marginal utility. Here, the marginal utility per dollar spent on Alpha is 30/5 = 6, and for Beta, it's 40/10 = 4. Therefore, the consumer should increase consumption of Alpha and decrease consumption of Beta to equalize the marginal utility per dollar spent.
Learning Objectives
- Comprehend the concept of maximizing utility for consumers.
- Engage the principle of marginal utility compared to price for maximum utility achievement.