A consumer had been consuming product X for some time. This period, she buys fewer X in order to try some units of a new product Y. She finds that her marginal utility of X is 20 (at a price of $10 per unit), while the marginal utility of Y is 36 (at a price of $12). The utility-maximizing rule suggests that this consumer should
A) increase consumption of product X because of its lower price.
B) increase consumption of product X because it is an old reliable product.
C) increase consumption of product Y because it has a higher MU/P.
D) increase consumption of product Y because it has a higher MU.

Question

Quizplus · Accepted Answer

The utility-maximizing rule suggests that the consumer should allocate her budget in a way that the marginal utility per dollar spent is equal across all goods. In this case, since the marginal utility per dollar for product Y (3) is higher than that of product X (2), she should buy more of product Y and less of product X. Therefore, the consumer should increase consumption of product Y because it has a higher MU/P.

A Consumer Had Been Consuming Product X for Some Time