A utility maximizing person gets marginal utility of 20 from consuming their last piece of bread and of 10 from consuming their last glass of milk.If a piece of bread costs 5 cents,then a glass of milk must cost 20 cents.

Question

Quizplus · Accepted Answer

We can use the concept of marginal utility per dollar to solve this problem. Marginal utility per dollar is calculated by dividing the marginal utility of a good by its price. In this case, the marginal utility per dollar of bread is 20/5 = 4 and the marginal utility per dollar of milk is 10/unknown price. We need to solve for the unknown price by setting the two marginal utilities per dollar equal to each other: 4 = 10/unknown price. Solving for the unknown price, we get: unknown price = 10/4 = 2.5. Therefore, a glass of milk actually costs 2.5 times more than a piece of bread, which means it costs 12.5 cents, not 20 cents.

A Utility Maximizing Person Gets Marginal Utility of 20 from Consuming