Betty is maximizing her satisfaction from spending her budget on two items, movie rentals and music downloads. If her marginal utility from the last movie rental is twice that from the last music download, what is the price of a movie rental if the price of a music download is $0.80?
A)$0.40
B)$0.80
C)$1.20
D)$1.60

Question

Quizplus · Accepted Answer

According to the principle of utility maximization, consumers allocate their budget in a way that the last dollar spent on each good provides the same marginal utility. If the marginal utility from the last movie rental is twice that from the last music download, and the price of a music download is $0.80, then the price of a movie rental must be twice that, which is $1.60, to equalize the marginal utility per dollar spent on each.

Betty Is Maximizing Her Satisfaction from Spending Her Budget on Two