A utility-maximizing consumer who is considering two goods, x and y, would allocate her budget in such a way that A)MU_x = MU_y B)MU_x MU_y C)MU_x/P_x MU_y/P_y D)MU_x/P_x = MU_y/P_y E)MU_x/P_x

Question

A utility-maximizing consumer who is considering two goods, x and y, would allocate her budget in such a way that A)MU_x = MU_y B)MU_x > MU_y C)MU_x/P_x > MU_y/P_y D)MU_x/P_x = MU_y/P_y E)MU_x/P_x < MU_y/P_y

Quizplus · Accepted Answer

The consumer would allocate her budget in such a way that the marginal utility per dollar spent on both goods is equal. This is represented by the equation MUS1U1B1xS1U1B0/PS1U1B1xS1U1B0 = MUS1U1B1yS1U1B0/PS1U1B1yS1U1B0, where MUS1U1B1x and MUS1U1B1y represent the marginal utility of goods x and y respectively, and PS1U1B1x and PS1U1B1y represent the price of goods x and y respectively. This ensures that the consumer maximizes her utility given her budget constraint.

A Utility-Maximizing Consumer Who Is Considering Two Goods, X and Y