Fred consumes quantities of butter and margarine; his utility function is given by U = 5M + 2B.If Fred has $10 to spend on butter and margarine,and if butter costs $2 per pound and margarine costs $1 per pound,what is his optimal bundle of butter and margarine?
A) 3 butter and 4 margarine.
B) 5 butter and 0 margarine.
C) 0 butter and 10 margarine.
D) 2 butter and 6 margarine.
E) None of the above.

Question

Quizplus · Accepted Answer

Fred will maximize his utility by spending all his money on margarine because the marginal utility per dollar spent on margarine (5) is higher than that for butter (1). With $10 and the price of margarine at $1 per pound, he can buy 10 pounds of margarine.

Fred Consumes Quantities of Butter and Margarine; His Utility Function