Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $3 and $4, respectively. The marginal utility of the last units of A and B are 15 and 24, respectively. These data suggest that Ms. Thomson
A)has preferences that are at odds with the principle of diminishing marginal utility.
B)considers A and B to be complementary goods.
C)should buy more A and less B.
D)should buy more B and less A.

Question

Quizplus · Accepted Answer

To maximize utility, the consumer should allocate spending so that the marginal utility per dollar spent is equal across all goods. Here, the marginal utility per dollar for A is 15/3 = 5, and for B is 24/4 = 6. Since the marginal utility per dollar is higher for B, Ms. Thomson should buy more B and less A to reach an optimal allocation of her income.

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