Asked by Sakina Pervez on May 19, 2024
Verified
Suppose you have a limited money income and you are purchasing products A and B, whose prices happen to be the same. To maximize your utility, you should purchase A and B in such amounts that
A) their marginal utilities are the same.
B) their total utilities are the same.
C) their marginal and total utilities are proportionate.
D) the income and substitution effects associated with each are equal.
Marginal Utilities
refers to the additional satisfaction or utility gained by consuming one more unit of a good or service.
Money Income
Money income includes the total earnings received by an individual or household in the form of wages, salaries, benefits, and returns on investments over a period.
Substitution Effect
The change in consumption patterns due to a change in the relative prices of goods, where individuals substitute away from more expensive goods towards cheaper ones.
- Acquire knowledge on the principle of utility optimization for individuals.
- Identify the conditions under which a consumer is in equilibrium.
Verified Answer
SW
sumit wadhawanMay 19, 2024
Final Answer :
A
Explanation :
To maximize utility given a budget constraint, the consumer should allocate their spending so that the marginal utility per dollar spent on each good is equal. Since the prices of A and B are the same, this means their marginal utilities should be equal.
Learning Objectives
- Acquire knowledge on the principle of utility optimization for individuals.
- Identify the conditions under which a consumer is in equilibrium.