In spending all his income on beer and pizza, Fred finds that the marginal utility of the last pizza he consumed is 8, and the marginal utility of the last bottle of beer is 4. The price of a bottle of beer is $1.50. If Fred has maximized his utility, the price of pizza must be
A)$0.75.
B)$1.00.
C)$3.00.
D)$4.50.

Question

Quizplus · Accepted Answer

To maximize utility, the consumer should allocate his budget in such a way that the marginal utility per dollar spent on each good is equal. The marginal utility of the last pizza is 8, and the marginal utility of the last beer is 4. Given the price of beer is $1.50, the marginal utility per dollar spent on beer is 4/$1.50 = 2.67. To have the marginal utility per dollar spent on pizza equal to this, we solve for the price of pizza: 8/Price of Pizza = 2.67, which gives Price of Pizza = $3.00.

In Spending All His Income on Beer and Pizza, Fred