If a consumer allocates income between goods A and B, total utility is maximized when:
A) the marginal utility of A = the marginal utility of B.
B) the marginal utility of A = the marginal utility of B = 0.
C) the price of A = price of B.
D) marginal utility of A / price of A = marginal utility of B / price of B = 0.
E) marginal utility of A / price of A = marginal utility of B / price of B.

Question

Quizplus · Accepted Answer

Total utility is maximized when the consumer allocates income between goods A and B in such a way that the marginal utility per dollar spent on each good is equal. This means that the consumer gets the most satisfaction for the money spent. Therefore, the ratio of marginal utility to price should be equal for both goods. This is represented by the equation: marginal utility of A / price of A = marginal utility of B / price of B. Choice E is the only option that reflects this.

If a Consumer Allocates Income Between Goods a and B