Pam buys only thread and fabric, and she buys the quantities that maximize her utility. Her marginal utility from a spool of thread is 30 units and her marginal utility from a yard of fabric is 60 units. If the price of a spool of thread is $4, then you are sure that the price of a yard of fabric is
A) $4.
B) $2.
C) $8.
D) $12.

Question

Quizplus · Accepted Answer

The marginal utility per dollar spent on thread is 30/4 = 7.5, and the marginal utility per dollar spent on fabric is 60/x, where x is the price of fabric. Since Pam buys the quantities that maximize her utility, the marginal utility per dollar spent on thread must be equal to the marginal utility per dollar spent on fabric. Therefore, 7.5 = 60/x, which gives x = 8.

Pam Buys Only Thread and Fabric, and She Buys the Quantities