Basil is maximizing his utility from consuming tea and crumpets.If the marginal utility of his last cup of tea was 24 units of utility and that of his last crumpet was 6 units of utility, which of the following is true?
A)The price of tea is six times the price of crumpets.
B)The price of crumpets is four times the price of tea.
C)The prices of tea and crumpets are equal.
D)The price of tea is four times the price of crumpets.
E)The MU of the next cup of tea is less than the MU of the next crumpet.

Question

Quizplus · Accepted Answer

To maximize utility, Basil should keep consuming both tea and crumpets until the marginal utility per dollar spent becomes equal for both. Since the marginal utility of tea is four times higher than that of crumpets (24/6=4), Basil is getting more utility per dollar spent on tea. Therefore, he should consume more tea and less crumpets until the marginal utility per dollar spent becomes equal. This implies that the price of tea should be four times the price of crumpets.

Basil Is Maximizing His Utility from Consuming Tea and Crumpets