Suppose a consumer is spending all of his/her income on two goods, A and B, in a manner where MU_a = 15 and MU_b = 75, and the P_a = $3 and the P_b = $15, then the consumer: A) is maximizing his/her utility. B) should increase his/her purchases of B and decrease the purchases of A. C) should spend more money on both goods. D) should spend less money on both goods. E) should increase the purchases of A and decrease the purchases of B.

Question

Quizplus · Accepted Answer

The given information implies that the marginal utility per dollar spent on good B is 5 times as much as the marginal utility per dollar spent on good A. Therefore, in order to maximize utility, the consumer should allocate more money to good B and less money to good A until the marginal utility per dollar spent on each good is equal (assuming there are no budget constraints or other factors influencing the consumer's purchasing decisions). Since the question does not provide any information about the consumer's budget or preferences, we cannot determine whether the current consumption bundle is optimal or not. Therefore, the correct answer is A) the consumer may or may not be maximizing his/her utility, depending on other factors that are not given.

Suppose a Consumer Is Spending All of His/her Income on Two