Suppose the price of $A$ is $\$ 20$, the price of $B$ is $\$ 10$, and that the consumer is currently spending all available income. At the consumer's current consumption basket the marginal utility of $A$ is 6 and the marginal utility of $B$ is 4 .
A) The consumer is currently maximizing utility.
B) The consumer could increase utility by consuming more of good $A$ and less of $\operatorname { good } B$.
C) The consumer could increase utility by consuming more of good $B$ and less of $\operatorname { good } A$.
D) Nothing can be said about the consumer's utility because we do not know the consumer's income or utility function.

Question

Quizplus · Accepted Answer

To maximize utility, the consumer should equalize the marginal utility per dollar spent on each good. Currently, the marginal utility per dollar for $A$ is $6/20 = 0.3$ and for $B$ is $4/10 = 0.4$. Since the marginal utility per dollar is higher for $B$, the consumer could increase utility by consuming more of $B$ and less of $A$.

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