Danny has $12 to spend on two goods: pies and pop.The price of a pie is $4,and the price of a can of pop is $2.To maximize his utility,Danny buys
A)2 pies and 2 cans of pop.
B)3 pies and no pop.
C)the combination that gives him the same marginal utility per dollar on pies as on pop.
D)6 cans of pop and no pie.
E)the combination that gives him the same total utility from pies as from pop.

Question

Quizplus · Accepted Answer

To maximize his utility, Danny should choose the combination that gives him the same marginal utility per dollar on pies as on pop. This means that the last dollar spent on pies should give him the same additional satisfaction as the last dollar spent on pop.

Assuming the marginal utility of the first pie is 10 and the marginal utility of the first can of pop is 8, Danny would maximize his utility by buying 2 pies (total cost of $8) and 2 cans of pop (total cost of $4). This gives him a total utility of 20 for the pies and 16 for the pop, for a total utility of 36.

If Danny were to buy 3 pies (total cost of $12), he would have a total utility of 30 for the pies, but no additional utility from the pop. If he were to buy 6 cans of pop (total cost of $12), he would have a total utility of 48 from the pop, but no additional utility from the pies. Therefore, the combination that gives him the same marginal utility per dollar on pies as on pop is the best choice.

Danny Has $12 to Spend on Two Goods: Pies and Pop.The