If John consumes only two goods, A and B, and he is maximizing his utility subject to his budget constraint,
A) MUA/MUB equals the ratio of the price of A to the price of B.
B) MUA/MUB equals 1.
C) MUA/MUB equals the ratio of the total utility of A to the total utility of B.
D) MUA/MUB is at a maximum.
E) MUA/MUB equals zero.

Question

Quizplus · Accepted Answer

In order to maximize his utility subject to his budget constraint, John is spending his entire budget on two goods, A and B, in a way that the ratio of the marginal utility of A to the price of A is equal to the ratio of the marginal utility of B to the price of B. This means MUA/PA = MUB/PB, which can be rearranged into MUA/MUB = PA/PB. Therefore, the correct option is A, as MUA/MUB equals the ratio of the price of A to the price of B.

If John Consumes Only Two Goods, a and B, and He