Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $2 and $4, respectively. The marginal utility of the last units of A and B are 16 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 less A and more B.
D)should buy less B and more 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 spent on A is 16/2 = 8, and for B, it's 24/4 = 6. Since the marginal utility per dollar is higher for A, Ms. Thomson should buy less B and more A to equalize the marginal utility per dollar spent across both goods.

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