Faced with two goods to buy,diamonds and silver,a utility-maximizing individual will buy according to which rule?
A)The price of diamonds equals the price of silver.
B)The marginal utility of diamonds equals the marginal utility of silver.
C)The price of diamonds divided by the marginal utility of silver equals the price of silver divided by the marginal utility of diamonds.
D)The marginal utility of diamonds divided by the price of diamonds equals the marginal utility of silver divided by the price of silver.

Question

Quizplus · Accepted Answer

The rule for utility-maximizing individual is to equate the marginal utility per dollar spent on each good. Therefore, the individual will choose the combination of diamonds and silver that makes the ratio of the marginal utility of diamonds to the price of diamonds equal to the ratio of the marginal utility of silver to the price of silver. This means that the individual will buy diamonds and silver such that MUd/Pd = MUs/Ps, where MUd is the marginal utility of diamonds, Pd is the price of diamonds, MUs is the marginal utility of silver, and Ps is the price of silver. This implies that D is the correct answer as it is the only choice that reflects this rule.

Faced with Two Goods to Buy,diamonds and Silver,a Utility-Maximizing Individual