If a consumer is spending all of his/her income in a manner where MU_a / P_a = MU_b / P_b, then the consumer: A) should increase the consumption of A and decrease the consumption of B. B) is maximizing his/her utility. C) should increase the consumption of B and decrease the consumption of A. D) should increase the consumption of both A and B. E) should decrease the purchases of both A and B.

Question

Quizplus · Accepted Answer

The equation MU_a / P_a = MU_b / P_b represents the marginal utility per dollar spent on A and B respectively. If this equation holds, it means that the consumer is allocating their spending in a way that the marginal utility per dollar spent on A is the same as the marginal utility per dollar spent on B. This is the condition for utility maximization, as allocating one more dollar to either A or B would result in a lower marginal utility per dollar spent on that good. Therefore, the consumer is already maximizing their utility and option B is the correct answer.

If a Consumer Is Spending All of His/her Income in a Manner