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. In order to maximize "happiness" subject to his limited budget, Gonzo should purchase coke and hot dogs so that

Question

Quizplus · Accepted Answer

In order to maximize happiness, Gonzo should allocate his budget in such a way that he obtains the same marginal utility per dollar spent on coke and hot dogs. This means that he should consume coke and hot dogs until the marginal utility per dollar spent on each good is equal. Therefore, the addition to happiness per dollar spent on coke should be equal to the addition to happiness per dollar spent on hot dogs, which is what choice D states.

Gonzo Consumes Only Two Things--Coke and Hot Dogs