Sally devotes all of her income to the consumption of apples and Reese's Peanut Butter Cups.At her current level of consumption,the marginal utility of an apple is six and the marginal utility of a Reese's Peanut Butter Cup is eight.Assume that diminishing marginal utility applies to both apples and Reese's Peanut Butter Cups.Suppose the price of an apple is $0.20 and the price of a Reese's Peanut Butter Cup is $0.25.To maximize her total utility,assuming that the goods are divisible,she would:
A) consume more Reese's Peanut Butter Cups and fewer apples.
B) consume less of both goods.
C) consume more apples and fewer Reese's Peanut Butter Cups.
D) There is not enough information to justify a change in her current level of consumption.

Question

Quizplus · Accepted Answer

To maximize utility, Sally should equalize the marginal utility per dollar spent on each good. Currently, the marginal utility per dollar for apples is 6/0.20 = 30, and for Reese's is 8/0.25 = 32. Since the marginal utility per dollar is higher for Reese's, she should consume more Reese's and fewer apples.

Sally Devotes All of Her Income to the Consumption of Apples