Suppose the price of a pair of jeans is $25 and the price of a T-shirt is $15.The consumer's budget is entirely allocated.If the marginal utility from a pair of jeans is 100 units and the marginal utility from a T-shirt is 75 units,the consumer is
A) in equilibrium because his or her utility is maximized.
B) not in equilibrium and should purchase fewer jeans and more T-shirts.
C) not in equilibrium and should purchase fewer T-shirts and more jeans.
D) not in equilibrium but should maintain the current level of purchases.
E) not in equilibrium and should purchase more T-shirts and more jeans.

Question

Quizplus · Accepted Answer

To maximize utility, the consumer should equalize the marginal utility per dollar spent across all goods. Here, the marginal utility per dollar for jeans is 100/25 = 4, and for T-shirts, it's 75/15 = 5. Since the marginal utility per dollar is higher for T-shirts, the consumer should buy fewer jeans and more T-shirts to reach equilibrium.

Suppose the Price of a Pair of Jeans Is $25