A consumer is in equilibrium and is spending income in such a way that the marginal utility of product X is 40 units and that of Y is 16 units. If the unit price of X is $5, then the price of Y must be
A)$1 per unit.
B)$2 per unit.
C)$3 per unit.
D)$4 per unit.

Question

Quizplus · Accepted Answer

According to the principle of consumer equilibrium (or the law of equi-marginal utility), a consumer allocates their income in such a way that the ratio of the marginal utility to the price of each good is equal. Therefore, MUx/Px = MUy/Py. Given MUx = 40, Px = $5, and MUy = 16, solving for Py gives Py = (MUy * Px) / MUx = (16 * 5) / 40 = $2 per unit.

A Consumer Is in Equilibrium and Is Spending Income in Such