Derek has $1 to spend at the grocery store.An apple,an orange,and a banana cost $.50 each.If Derek's MU_A/P_A (ratio of marginal utility to price) of an apple is 45,MU_O/P_O of an orange is 38,and MU_B/P_B of a banana is 52,he will purchase a(n) _____ first and a(n) _____ second. A)apple; orange B)orange; apple C)banana; orange D)banana; apple E)orange; banana

Question

Quizplus · Accepted Answer

To maximize his utility, Derek should choose the item with highest MUS/price ratio which is the banana with a ratio of 52. He can buy only 2 bananas with his $1. Therefore, Derek's total utility would be 2*52 = 104. 
Next, he should choose the item with the next highest MUS/price ratio which is the apple with a ratio of 45. He can buy only 1 apple with the remaining $0. The total utility from the 1 apple would be 1*45 = 45. 
Therefore, he should purchase a banana first and apple second.

Derek Has $1 to Spend at the Grocery Store