Gonzo consumes only two things--coke and hot dogs.We can define the addition to "happiness" of consuming an additional coke as the marginal utility of coke and that for hot dogs as the marginal utility of hot dogs.The prices of coke and hot dogs are fixed and Gonzo has a limited budget.To maximize "happiness" subject to his limited budget,Gonzo should purchase coke and hot dogs so that
A)the marginal utility of coke is the same as the marginal utility of hot dogs.
B)he spends the same amount on coke as on hot dogs.
C)the addition to happiness of the last coke is the same as the addition to happiness of the last hot dog.
D)the addition to happiness per dollar spent on coke is the same as the addition to happiness per dollar spent on hot dogs.

Question

Quizplus · Accepted Answer

To maximize his happiness, Gonzo should allocate his budget in such a way that the marginal utility per dollar spent is equal for both coke and hot dogs. In other words, he should keep buying more of the product with a higher marginal utility per dollar until the marginal utility per dollar spent on both products is equalized. This is because any additional expenditure on a product with lower marginal utility per dollar will result in a decrease in overall happiness. Therefore, the answer is D - the addition to happiness per dollar spent on coke should be the same as the addition to happiness per dollar spent on hot dogs.

Gonzo Consumes Only Two Things--Coke and Hot Dogs