Basil spends all his income on apples and bananas. Apples cost $2.50 per pound and bananas cost $1.50 per pound. The marginal utility is 20 for the last pound of apples purchased and 10 for the last pound of bananas. To maximize his utility, Basil should buy

Question

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Basil should allocate his money in a way that the marginal utility per dollar spent is equal for both goods. Currently, 1 dollar spent on apples yields a marginal utility of 8 (20/2.5), while 1 dollar spent on bananas yields a marginal utility of 6.67 (10/1.5). This means that Basil should reallocate his spending towards bananas, which provide a higher marginal utility per dollar. Therefore, Basil should buy fewer apples and more bananas to maximize his utility.

Basil Spends All His Income on Apples and Bananas