Suppose a consumer's level of satisfaction is given by AB2 and he/she has a total of $10 to spend on goods A and B. If the price of A is $1 and the price of B is $2, and assuming you can only purchase whole units (not fractional)of A and B, how many units of A and B should he/she purchase?
A)2 units of A and 4 units of B.
B)4 units of A and 3 units of B.
C)6 units of A and 2 units of B.
D)0 units of A and 5 units of B.

Question

Quizplus · Accepted Answer

To maximize satisfaction, the consumer should allocate their budget in a way that the marginal utility per dollar spent is the same for both goods. In this case, the marginal utility per dollar spent on A is 2 and the marginal utility per dollar spent on B is 1, so the consumer should buy more units of A until the marginal utility per dollar spent on A also becomes 1.

Since the price of A is $1, the consumer should buy as many units of A as possible until they have spent $5 (half of their budget). This means they can buy 5 units of A.

With $5 remaining, the consumer can buy 2.5 units of B, but since they cannot buy fractional units, they should buy 2 units of B with the remaining $4.

Therefore, the consumer should buy 4 units of A and 2 units of B for a total cost of $8, leaving $2 of their budget unused.

Suppose a Consumer's Level of Satisfaction Is Given by AB2