In spending all his income on beer and pizza, Fred finds that the marginal utility of the last pizza he consumed is 8, and the marginal utility of the last bottle of beer is 4. The price of a bottle of beer is $1.50. If Fred has maximized his utility, the price of pizza must be
A) $0.75.
B) $1.00.
C) $3.00.
D) $4.50.

Question

Quizplus · Accepted Answer

Fred maximizes utility when the ratio of marginal utility to price is equal for both goods. Thus, 8/Pizza Price = 4/1.50. Solving for the Pizza Price gives $3.00.

In Spending All His Income on Beer and Pizza, Fred