Suppose Hank spends his entire budget buying 2 bagels and 3 cups of coffee each day. Also, suppose the marginal utility of the second bagel is 100 and the marginal utility of the third cup of coffee is 200. Which of the following statements is TRUE?
A) Hank is not maximizing his utility.
B) Hank will be maximizing his utility as long as the price of a cup of coffee is twice the price of a bagel.
C) Hank might be maximizing utility only if the price of a cup of coffee is less than the price of a bagel.
D) Hank is not maximizing utility because he is not buying equal amounts of each good.

Question

Quizplus · Accepted Answer

Hank will be maximizing his utility if the marginal utility per dollar spent is equal for both goods. If the marginal utility of the second bagel is 100 and the third cup of coffee is 200, then the price of a cup of coffee should be twice the price of a bagel for utility maximization.

Suppose Hank Spends His Entire Budget Buying 2 Bagels and 3