Suppose Mary is currently spending all her income on cookies and milk.The marginal utility of cookies is 15, the price of cookies is $5, the marginal utility of milk is 10, and the price of milk is $1.To increase her total utility, Mary should:
A)buy more cookies and less milk.
B)buy more milk and fewer cookies.
C)buy more of both goods.
D)buy less of both goods.
E)do nothing.She is currently maximizing utility with her limited budget.

Question

Quizplus · Accepted Answer

To increase total utility, Mary should follow the principle of equi-marginal utility, which suggests allocating spending so that the marginal utility per dollar is equal across goods. Currently, the marginal utility per dollar for cookies is 15/5 = 3, and for milk, it's 10/1 = 10. Since the marginal utility per dollar is higher for milk, she should buy more milk and fewer cookies to increase her total utility.

Suppose Mary Is Currently Spending All Her Income on Cookies