In May and June, Tammy spent all her clothing budget on bathing suits and beach bags. Each bathing suit cost $75. At Tammy's optimal choice, her marginal utility from the last bathing suit purchased is 300 and her marginal utility from the last beach bag purchased is 200. This means that each handbag must cost:

Question

Quizplus · Accepted Answer

According to the principle of utility maximization, the consumer's expenditure is allocated in such a way that the marginal utility per dollar spent on each good is the same. Therefore, the ratio of the marginal utility of the bathing suits to their price (300/$75) should equal the ratio of the marginal utility of the beach bags to their price (200/Price of beach bag). Solving for the price of the beach bag gives $50.

In May and June, Tammy Spent All Her Clothing Budget