Suppose Sally allocates her budget between two goods, A and B. She spends her entire income on a combination of A and B, for which the ratio of marginal utility of good A to its price exceeds the ratio of marginal utility of good B to its price. She can increase her total utility by buying:
A)more A and less B.
B)more B and less A.
C)more A without changing her consumption of B.
D)less B without changing her consumption of A.
E)more B and more A.

Question

Suppose Sally allocates her budget between two goods, A and B. She spends her entire income on a combination of A and B, for which the ratio of marginal utility of good A to its price exceeds the ratio of marginal utility of good B to its price. She can increase her total utility by buying:​
A)more A and less B.
B)more B and less A.
C)more A without changing her consumption of B.
D)less B without changing her consumption of A.
E)more B and more A.

Quizplus · Accepted Answer

If Sally were to buy more of A and less of B, the marginal utility of A will eventually decrease while the marginal utility of B will increase. Since the ratio of marginal utility of A to price is already greater than the ratio of marginal utility of B to price, this shift will increase her total utility. Therefore, option A is the best choice.

Suppose Sally Allocates Her Budget Between Two Goods, a and B