Suppose Caesar allocates his entire budget to the purchase of soft drinks and chips.The marginal utility of the last bottle of soft drink purchased is 12 utils,and each bottle costs $1.20.The marginal utility of the last bag of chips purchased is 8 utils,and each bag costs $1.In order to maximize his utility,Caesar should
A)Buy more soft drinks and fewer chips since he gets more marginal utility per dollar from soft drinks.
B)Buy more chips and fewer soft drinks because of the lower price for chips.
C)Buy more soft drinks and fewer chips because the soft drink has fewer calories.
D)Not change anything because he has made the choice that gives him the most total utility.

Question

Quizplus · Accepted Answer

To maximize utility, Caesar should allocate his budget in such a way that the marginal utility per dollar spent on each good is equal. In this case, the marginal utility per dollar spent on soft drinks is higher (12/1.20 = 10 utils per dollar) than the marginal utility per dollar spent on chips (8/1 = 8 utils per dollar). Therefore, Caesar should buy more soft drinks and fewer chips. The fact that soft drinks have fewer calories is not relevant in this analysis.

Suppose Caesar Allocates His Entire Budget to the Purchase of Soft