A consumer spends his limited income on three goods such that the MU_X = 4, MU_Y = 4, MU_Z = 4; and P_X = 4, P_Y = 2, P_Z = 1. Which of the following statements is (are) TRUE?
I. Because the marginal utilities of all three goods are equal, the consumer is maximizing utility.
II. The consumer receives the most bang for the buck from good Z.
III. The marginal utility per dollar spent is not equal across all three goods, so the consumer is not maximizing utility.

Question

Quizplus · Accepted Answer

The consumer maximizes utility when the marginal utility per dollar spent (MU/P) is equal across all goods. Here, MU/P for X = 4/4 = 1, for Y = 4/2 = 2, and for Z = 4/1 = 4. Since these ratios are not equal, the consumer is not maximizing utility (III is true). The highest MU/P ratio is for good Z, indicating the consumer gets the most utility per dollar spent on Z (II is true).

A Consumer Spends His Limited Income on Three Goods Such