Suppose the price of a pair of jeans is $25 and the price of a t-shirt is $15. The consumer's budget is entirely allocated. If the marginal utility from a pair of jeans is 100 units and the marginal utility from a t-shirt is 75 units, the consumer is
A) not in equilibrium and should purchase more t-shirts and more jeans.
B) not in equilibrium but should maintain the current level of purchases.
C) in equilibrium because his or her utility is maximised.
D) not in equilibrium and should purchase fewer t-shirts and more jeans.
E) not in equilibrium and should purchase fewer jeans and more t-shirts.

Question

Quizplus · Accepted Answer

To be in equilibrium, the consumer should allocate their budget in a way that the marginal utility per dollar spent on each good is equal. Here, the marginal utility per dollar for jeans is 100/25 = 4 units per dollar, and for t-shirts, it is 75/15 = 5 units per dollar. Since the marginal utility per dollar is higher for t-shirts, the consumer should buy fewer jeans and more t-shirts to reach equilibrium.

Suppose the Price of a Pair of Jeans Is $25