A consumer is in equilibrium and is spending income in such a way that the marginal utility of product X is 40 units and that of Y is 16 units. If the unit price of X is $5, then the price of Y must be
A) $1 per unit.
B) $2 per unit.
C) $3 per unit.
D) $4 per unit.

Question

Quizplus · Accepted Answer

To reach equilibrium, the consumer must allocate their money in a way that the marginal utility per dollar spent on each product is equal. We can calculate the marginal utility per dollar for each product by dividing the marginal utility of each by its respective price:

MUx/Px = 40/5 = 8
MUy/Py = 16/Py

For equilibrium, MUx/Px = MUy/Py. 
Solving for Py ,
8 = 16/Py , 
Py = $2 per unit.

Therefore, the price of Y must be $2 per unit.

A Consumer Is in Equilibrium and Is Spending Income in Such