Marge has spent her entire budget on milk and cookies.The last glass of milk provided Marge with 10 additional utils,and the last cookie provided her with 25 additional utils.The price of a cookie is twice the price of a glass of milk.Assuming that diminishing marginal utility applies to both goods,Marge should consume _____ milk and _____ cookies.

Question

Quizplus · Accepted Answer

To maximize utility given a budget constraint, Marge should equalize the marginal utility per dollar spent on each good. Since the last cookie provides more additional utility than the last glass of milk, but costs twice as much, she is currently getting more utility per dollar from milk. To optimize, she should consume less milk (which has a lower marginal utility) and more cookies (which have a higher marginal utility), adjusting until the marginal utility per dollar spent is equal for both goods.

Marge Has Spent Her Entire Budget on Milk and Cookies