As a consumer allocates income between good A and good B, total utility is maximized when
A)the marginal utility of A = the marginal utility of B
B)the marginal utility of A = the marginal utility of B = 0
C)the price of A = price of B
D)marginal utility of A/price of A = marginal utility of B/price of B = 0
E)marginal utility of A/price of A = marginal utility of B/price of B

Question

Quizplus · Accepted Answer

The consumer should allocate their income between good A and good B in such a way that the marginal utility per dollar spent is equal for both goods. This means that the consumer should allocate their income in such a way that the marginal utility of A divided by its price is equal to the marginal utility of B divided by its price. Therefore, choice E, which states that the marginal utility of A/price of A = marginal utility of B/price of B, is the best choice.

As a Consumer Allocates Income Between Good a and Good