Utility is maximized in the consumption of two goods by equating the:
A) marginal utility of one good to the price of the other.
B) ratios of marginal utility to price for both goods.
C) ratios of total utility to price of both goods.
D) marginal utilities of both goods.

Question

Quizplus · Accepted Answer

In order to maximize utility, the consumer should allocate their budget in such a way that the ratio of marginal utility to price is equal for both goods. This is because it ensures that the consumer is getting the most satisfaction for their money spent. Equating the marginal utilities of both goods may not necessarily result in the most efficient allocation of resources, as one good may have a higher marginal utility but a higher price as well. Similarly, looking at the ratios of total utility to price may not be as informative as marginal utility is a better indicator of the marginal satisfaction gained from consuming an additional unit of a good.

Utility Is Maximized in the Consumption of Two Goods by Equating