Suppose the price of A is $20, the price of B is $10, and that the consumer is currently spending all available income. At the consumer's current consumption basket the marginal utility of A is 8 and the marginal utility of B is 2.
A) The consumer is currently maximizing utility.
B) The consumer could increase utility by consuming more of good A and less of good B .
C) The consumer could increase utility by consuming more of good B and less of good A .
D) Nothing can be said about the consumer's utility because we do not know the consumer's income or utility function.

Question

Suppose the price of A is $20, the price of B  is $10, and that the consumer is currently spending all available income. At the consumer's current consumption basket the marginal utility of A is 8 and the marginal utility of B  is 2.
A) The consumer is currently maximizing utility.
B) The consumer could increase utility by consuming more of good A and less of good B .
C) The consumer could increase utility by consuming more of good B and less of good A .
D) Nothing can be said about the consumer's utility because we do not know the consumer's income or utility function.

Quizplus · Accepted Answer

The marginal utility per dollar spent on good A is 8/20 = 0.4, while the marginal utility per dollar spent on good B is 2/10 = 0.2. Since the marginal utility per dollar spent on good A is greater than the marginal utility per dollar spent on good B, the consumer could increase utility by consuming more of good A and less of good B.

Suppose the Price of a Is $20, the Price of B