Suppose that MU_x = 10 and MU_y = 20. Further suppose that the consumer's budget constraint can be expressed as 20x + 10y = 400. For this consumer, the optimal amount of good x to buy would be A) 5. B) 0. C) 20. D) 40.

Question

Quizplus · Accepted Answer

The consumer should allocate their budget such that the marginal utility per dollar spent is equal for both goods. Here, MUx/Px = 10/20 = 0.5 and MUy/Py = 20/10 = 2. Since MUy/Py > MUx/Px, the consumer should spend all their budget on good y, making the optimal amount of good x to buy zero.

Suppose That MUx = 10 and MUy = 20

Suppose That MU_x = 10 and MU_y = 20