Traci consumes two goods, lemonade and pretzels. Lemonade costs $1 per glass, and she consumes it to the point where the marginal utility she receives from her last glass of lemonade is 3. Pretzels cost $2 per bag. The relationship between the marginal utility Traci gets from eating a bag of pretzels and the number of bags she eats per month is as follows: If Traci is maximizing his utility, how much does she spend on pretzels each month?

Question

Traci consumes two goods, lemonade and pretzels. Lemonade costs $1 per glass, and she consumes it to the point where the marginal utility she receives from her last glass of lemonade is 3. Pretzels cost $2 per bag. The relationship between the marginal utility Traci gets from eating a bag of pretzels and the number of bags she eats per month is as follows:  If Traci is maximizing his utility, how much does she spend on pretzels each month?

Quizplus · Accepted Answer

Traci will continue to consume lemonade until the marginal utility of the last glass equals the price of the glass. In this case, since the price is $1 and the marginal utility is 3, Traci will continue to consume lemonade until the third glass, at which point the marginal utility drops to 2 (according to the law of diminishing marginal utility).

Next, Traci should allocate her income between the two goods such that the marginal utility per dollar spent is equal for both goods. To determine how many bags of pretzels Traci should consume, we need to find the marginal utility per dollar spent on pretzels. We do this by dividing the marginal utility of each bag by the price of each bag. From the table, we see that the marginal utility for the first bag is 20/2 = 10, for the second bag is 16/2 = 8, and for the third bag is 12/2 = 6.

Since Traci is maximizing her utility, she will continue to consume pretzels until the marginal utility per dollar spent is equal to the marginal utility per dollar spent on lemonade. We can see from the table that this occurs at the point where Traci consumes 3 bags of pretzels. At this point, the marginal utility per dollar spent on pretzels is 6/2 = 3, which is equal to the marginal utility per dollar spent on lemonade.

Therefore, Traci will spend 3 × $2 = $6 on pretzels each month. The answer is (B) $6.

Traci Consumes Two Goods, Lemonade and Pretzels