Tyrell has $50 per week to spend on good A, which has a price of $5, and good B, which has a price of $4. He buys six units of A and five of B. The marginal utility of the sixth unit of A is 25, and the marginal utility of the fifth unit of B is 20. Which of the following is true?
A) He is maximizing his utility.
B) We cannot tell if he is maximizing his utility unless we know his total utility.
C) He is not maximizing his utility and should buy more of A.
D) He is not maximizing his utility and should buy more of B.
E) He is not maximizing his utility because he is not spending all of his income.

Question

Quizplus · Accepted Answer

To maximize utility, the consumer should allocate his/her money so that the marginal utility per dollar spent on one good is equal to the marginal utility per dollar spent on the other good. In this case, the marginal utility per dollar spent on A is 5, while the marginal utility per dollar spent on B is 4. Therefore, the consumer should buy more A, which he is already doing. Also, the fact that he has some money left over does not necessarily mean he is not maximizing utility, as he may have chosen to save some of his income for future consumption. Therefore, given the information provided, we can conclude that the consumer is maximizing his utility.

Tyrell Has $50 Per Week to Spend on Good A