The relative price of beer to bacon is 2:1. If Bob's current consumption is at a level where MUbeer/MUbacon is 1:2, then to maximize total utility Bob must
A)consume more beer and less bacon.
B)not change his current consumption of beer and bacon.
C)consume less beer and more bacon.
D)raise the price of beer.
E)consume twice as much beer and half as much bacon.

Question

Quizplus · Accepted Answer

If Bob's current consumption is at a level where MUbeer/MUbacon is 1:2, then to maximize total utility, he should consume less beer and more bacon.

MUbeer/MUbacon refers to the marginal utility per dollar spent on beer and bacon respectively. Since the relative price of beer to bacon is 2:1, one can assume that the marginal utility per dollar spent on bacon is twice that of beer. Therefore, to maximize total utility, Bob should consume more bacon and less beer. This is because he will get more marginal utility per dollar spent on bacon than beer.

The Relative Price of Beer to Bacon Is 2:1