Asked by Takafumi Yoshida on Jun 28, 2024
Verified
Faced with two goods to buy,diamonds and silver,a utility-maximizing individual will buy according to which rule?
A) The price of diamonds equals the price of silver.
B) The marginal utility of diamonds equals the marginal utility of silver.
C) The price of diamonds divided by the marginal utility of silver equals the price of silver divided by the marginal utility of diamonds.
D) The marginal utility of diamonds divided by the price of diamonds equals the marginal utility of silver divided by the price of silver.
Utility-Maximizing
A principle in economics where consumers aim to achieve the highest level of satisfaction with their choices, subject to their income and the prices of goods and services.
Marginal Utility
Marginal Utility represents the additional satisfaction or utility a consumer gains from consuming one more unit of a good or service.
- Comprehend the connection between maximizing utility and decisions regarding consumption as the prices of goods vary.
- Outline the significance of income and substitution effects in affecting the choices made by consumers and their demand in the marketplace.
Verified Answer
RK
regina kaykovaJun 30, 2024
Final Answer :
D
Explanation :
The rule for utility-maximizing individual is to equate the marginal utility per dollar spent on each good. Therefore, the individual will choose the combination of diamonds and silver that makes the ratio of the marginal utility of diamonds to the price of diamonds equal to the ratio of the marginal utility of silver to the price of silver. This means that the individual will buy diamonds and silver such that MUd/Pd = MUs/Ps, where MUd is the marginal utility of diamonds, Pd is the price of diamonds, MUs is the marginal utility of silver, and Ps is the price of silver. This implies that D is the correct answer as it is the only choice that reflects this rule.
Learning Objectives
- Comprehend the connection between maximizing utility and decisions regarding consumption as the prices of goods vary.
- Outline the significance of income and substitution effects in affecting the choices made by consumers and their demand in the marketplace.