Suppose that the ratio of marginal utility to price for good $A$ is 10 , and the ratio of marginal utility to price for good $B$ is 5 . Assume that for her current consumption of goods $A$ and $B$ the consumer is experiencing diminishing marginal utility for each good. In order for this consumer to be at her utility maximizing point, she should:
A) consume less $A$ and more $B$.
B) consume more $A$ and less $B$.
C) consume more $A$ and more $B$.
D) do nothing - the consumer is already in equilibrium.

Question

Quizplus · Accepted Answer

Since the ratio of marginal utility to price for good A is greater than that of good B, the consumer would be getting more utility per dollar spent by consuming more of good A. However, since the consumer is experiencing diminishing marginal utility for each good, the marginal utility per dollar spent on good A decreases as she consumes more of it. Therefore, in order to maximize utility, the consumer should consume less of good A and more of good B, where the ratio of marginal utility to price is lower but the marginal utility per dollar spent is increasing as she consumes more of it.

Suppose That the Ratio of Marginal Utility to Price for Good