Joe is maximizing utility by consuming three colas at $2 apiece and four hot dogs. The last cola gave him 200 units of utility, and the last hot dog gave him 300 units of utility. The price of each hot dog is:
A) $3.00.
B) $1.50.
C) $1.00.
D) $0.50.

Question

Quizplus · Accepted Answer

Joe is maximizing utility, so the marginal utility per dollar spent on colas and hot dogs should be equal. The marginal utility per dollar for colas is 200/2 = 100. For hot dogs, it should also be 100, so 300/x = 100, where x is the price of a hot dog. Solving for x gives x = $3.00.

Joe Is Maximizing Utility by Consuming Three Colas at $2