Bill currently uses his entire budget to purchase 5 cans of Pepsi and 3 hamburgers per week. The price of Pepsi is $1 per can, the price of a hamburger is $2, Bill's marginal utility from Pepsi is 4, and his marginal utility from hamburgers is 6. Bill could increase his utility by:
A) increasing Pepsi consumption and reducing hamburger consumption.
B) increasing hamburger consumption and reducing Pepsi consumption.
C) maintaining his current consumption choices.
D) We do not have enough information to answer this question.

Question

Quizplus · Accepted Answer

Since Bill's marginal utility from Pepsi is 4 and the price of Pepsi is $1, his marginal utility per dollar spent on Pepsi is 4. This is greater than his marginal utility per dollar spent on hamburgers, which is 3 (6/2).
Therefore, Bill can increase his overall utility by increasing Pepsi consumption and reducing hamburger consumption. He should keep increasing Pepsi consumption until his marginal utility per dollar spent on Pepsi drops to 3, which is equal to his marginal utility per dollar spent on hamburgers.

Bill Currently Uses His Entire Budget to Purchase 5 Cans