The Smith family is allocating its monthly household expenditure between only two goods, food and clothing. Suppose that the price of food is $5 per unit, and the price of clothing is $10 per unit and that the marginal utility that the family is receiving from its consumption of food is currently
25. What is the family's marginal utility from its consumption of clothing if it is maximizing its utility?

Question

Quizplus · Accepted Answer

To maximize utility, the ratio of marginal utility to price should be equal for both goods. For food, MU/Price = 25/5 = 5. Therefore, for clothing, MU/Price should also be 5. Since the price of clothing is $10, the marginal utility from clothing should be 5 * 10 = 50.

The Smith Family Is Allocating Its Monthly Household Expenditure Between