Nathalie is maximizing total utility while consuming food and clothing. Her marginal utility from food and clothing is 50 and 25, respectively. If clothing is priced at €10 per unit, the price of food must
A) be rising.
B) be falling.
C) equal €10 as well.
D) equal €20.

Question

Quizplus · Accepted Answer

To maximize total utility, Nathalie should allocate her spending in a way that the marginal utility per euro spent is equal across goods. Since the marginal utility per unit of clothing is 25 and the price is €10, the marginal utility per euro spent on clothing is 2.5. To allocate spending in a way that the marginal utility per euro spent on food is equal to 2.5, the price of food must be €20 (50/20=2.5). Therefore, the answer is D, the price of food must be €20.

Nathalie Is Maximizing Total Utility While Consuming Food and Clothing