Faced with two goods to buy, good 1 and good 2, a utility-maximizing individual will buy according to which of the following statements?
A) price of good 1 = price of good 2
B) MU of good 1 = MU of good 2
C) price of good 1 divided by MU of good 2 = price of good 2 divided by MU of good 1
D) MU of good 1 divided by price of good 1 = MU of good 2 divided by price of good 2

Question

Quizplus · Accepted Answer

The best choice is when the marginal utility per dollar spent on both goods is the same (MU/P ratio). This means that the individual is getting the same utility for each dollar spent on each good. Therefore, the individual should choose the combination of goods that maximizes the total utility subject to the budget constraint. Choice D is the only statement that refers to the MU/P ratio for both goods, so it is the correct answer.

Faced with Two Goods to Buy, Good 1 and Good