Suppose that at your current consumption of two goods, A and B, MU_A/P_A = 25 and MU_B/P_B = 20. In order to maximize, your utility you should: A) leave your spending unchanged. B) purchase less of A and more of B. C) purchase more of A and less of B. D) purchase less of A and B.

Question

Quizplus · Accepted Answer

MU_A/P_A = 25 implies that the marginal utility per dollar spent on good A is 25. MU_B/P_B = 20 implies that the marginal utility per dollar spent on good B is 20. To maximize utility, a consumer should allocate spending in such a way that the marginal utility per dollar spent is equal across all goods. Since the marginal utility per dollar spent is higher for good A than for good B, the consumer should purchase more of good A and less of good B in order to balance out the marginal utility per dollar spent on each good. Therefore, the best choice is C.

Suppose That at Your Current Consumption of Two Goods, a and B