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 much does she spend on pretzels 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 much does she spend on pretzels each month?

Quizplus · Accepted Answer

For Traci to be maximizing her utility, she must allocate her spending such that the marginal utility per dollar spent on each good is equal.

The marginal utility per dollar spent on lemonade is 3/1 = 3.

To find the marginal utility per dollar spent on pretzels, we divide the marginal utility of each bag by the price of each bag: 
MU/Price = (20/2 = 10), (16/2 = 8), (12/2 = 6), (8/2 = 4), (4/2 = 2)

So the marginal utility per dollar spent on pretzels starts at 10 and decreases as Traci consumes more pretzels.

To equalize the marginal utility per dollar spent on each good, Traci should consume 3 glasses of lemonade and, from the chart, 2 bags of pretzels.

The total spending on pretzels is then 2 bags x $2 per bag = $4 per month.

Therefore, the correct answer is C) $8.

Traci Consumes Two Goods, Lemonade and Pretzels