The following table shows Erica's utility for muffins and grapefruit.

-Refer to the above information to answer this question.If Erica has a budget of $5 and the price of both muffins and grapefruit are $1,what will be her optimal purchase?
A)1 muffin and 4 grapefruit.
B)2 muffins and 3 grapefruit.
C)3 muffins and 2 grapefruit.
D)4 muffins and 1 grapefruit.
E)5 muffins.

Question

The following table shows Erica's utility for muffins and grapefruit.
 
-Refer to the above information to answer this question.If Erica has a budget of $5 and the price of both muffins and grapefruit are $1,what will be her optimal purchase?
A)1 muffin and 4 grapefruit. 
B)2 muffins and 3 grapefruit. 
C)3 muffins and 2 grapefruit. 
D)4 muffins and 1 grapefruit. 
E)5 muffins.

Quizplus · Accepted Answer

To find Erica's optimal purchase, we need to calculate her marginal utility per dollar for each item. Marginal utility per dollar is calculated by dividing the marginal utility by the price of the item.

For muffins, the marginal utility per dollar is 10/1 = 10. 
For grapefruit, the marginal utility per dollar is 12/1 = 12.

Since Erica's budget is $5, her maximum utility is achieved when she spends her entire budget on the item with the highest marginal utility per dollar, which is grapefruit.

Therefore, Erica's optimal purchase is 3 grapefruit for a total of $3, leaving her with $2. With the remaining money, she can purchase 2 muffins for a total of $2.

So, the best choice for Erica is to purchase:
2 muffins and 3 grapefruit.

The Following Table Shows Erica's Utility for Muffins and Grapefruit