Consider a consumer who spends all income on only two goods: pizza and soda. An extra slice of pizza would give the consumer 60 extra utils, while an extra can of soda would give the consumer 20 extra utils. Pizza costs $3 per slice, and soda costs $1 per can. In this situation, the consumer:
A) is buying too much pizza and not enough soda.
B) should purchase more pizza and less soda.
C) has maximized his or her total utility.
D) needs to equate the marginal utilities for pizza and soda.

Question

Quizplus · Accepted Answer

To maximize total utility, the consumer should allocate their spending in a way that the marginal utility per dollar spent on each good is equal. In this case, the marginal utility per dollar spent on pizza is 20 (60 utils/ $3), and the marginal utility per dollar spent on soda is 20 (20 utils/ $1). This means that the consumer is already maximizing total utility by spending equal proportions on both goods. Any shift in spending toward one of the goods would decrease total utility as marginal utility would decrease. Therefore, the consumer has already maximized their total utility by allocating their spending equally between pizza and soda.

Consider a Consumer Who Spends All Income on Only Two