Traci consumes two goods, lemonade and pretzels. Lemonade costs $1 per glass, and she consumes it to the point where the marginal utility she receives from her last glass of lemonade is 3. Pretzels cost $2 per bag. The relationship between the marginal utility Traci gets from eating a bag of pretzels and the number of bags she eats per month is as follows: If Traci is maximizing his utility, how many bags of pretzels does he buy each month?

Question

Traci consumes two goods, lemonade and pretzels. Lemonade costs $1 per glass, and she consumes it to the point where the marginal utility she receives from her last glass of lemonade is 3. Pretzels cost $2 per bag. The relationship between the marginal utility Traci gets from eating a bag of pretzels and the number of bags she eats per month is as follows:  If Traci is maximizing his utility, how many bags of pretzels does he buy each month?

Quizplus · Accepted Answer

To maximize utility, Traci should allocate her budget so that the marginal utility per dollar spent on both goods are equal.

MU of lemonade = 3
Price of lemonade = $1
MU per dollar spent on lemonade = 3/1 = 3

To find the marginal utility per dollar spent on pretzels, we need to look at the table. 
For the first bag, MU/Dollar = 10/2 = 5
For the second bag, MU/Dollar = 8/2 = 4
For the third bag, MU/Dollar = 6/2 = 3
For the fourth bag, MU/Dollar = 4/2 = 2
For the fifth bag, MU/Dollar = 2/2 = 1
For the sixth bag, MU/Dollar = 0/2 = 0

The point of utility maximization is where MU per dollar on both goods are equal. In this case, that point is at 4 bags of pretzels. At that point, the marginal utility per dollar spent on pretzels is 3 (see table above), which is equal to the marginal utility per dollar spent on lemonade. Therefore, the answer is B) 4.

Traci Consumes Two Goods, Lemonade and Pretzels