Tyrell has $50 to spend on good A and good B per week. The price of good A is $5 and that of good B is $4. He buys six units of good A and five units of good B. The marginal utility of the sixth unit of A is 25 units, and the marginal utility of the fifth unit of B is 20 units. Which of the following is true?
A)He is maximizing his utility.
B)His last dollar spent on good A exceeds the last dollar spent on good B.
C)He is not maximizing his utility and should buy more of A.
D)He is not maximizing his utility and should buy more of B.
E)He is not maximizing his utility because he is not spending all of his income.

Question

Tyrell has $50 to spend on good A and good B per week. The price of good A is $5 and that of good B is $4. He buys six units of good A and five units of good B. The marginal utility of the sixth unit of A is 25 units, and the marginal utility of the fifth unit of B is 20 units. Which of the following is true?​
A)He is maximizing his utility.
B)His last dollar spent on good A exceeds the last dollar spent on good B.
C)He is not maximizing his utility and should buy more of A.
D)He is not maximizing his utility and should buy more of B.
E)He is not maximizing his utility because he is not spending all of his income.

Quizplus · Accepted Answer

To maximize utility, the consumer should allocate his money in such a way that the marginal utility per dollar spent on each good is the same. In this case, the last dollar spent on both goods provides the same utility (MU of the 6th unit of A = 25, MU of the 5th unit of B = 20), so he is already maximizing his utility. Option B is incorrect, as the last dollar spent on both goods provides the same utility. Option C and D are incorrect because he is already maximizing utility. Option E is also incorrect because it is not necessary to spend all the income to maximize utility.

Tyrell Has $50 to Spend on Good a and Good