Mr. Smith is consuming beer and wine. At his current level of consumption, the marginal utility per dollar is 30 units for beer and 20 units for wine. Mr. Smith should
A) consume twice as much beer as wine.
B) consume twice as much wine as beer.
C) increase his consumption of beer relative to wine.
D) increase his consumption of wine relative to beer.

Question

Quizplus · Accepted Answer

Mr. Smith should allocate his consumption in such a way that the marginal utility per dollar spent is equal for both beer and wine. Currently, beer has a higher marginal utility per dollar than wine, indicating that Mr. Smith should consume more beer and less wine to equalize the marginal utility per dollar spent on each. Therefore, he should increase his consumption of beer relative to wine.

Mr Smith Is Consuming Beer and Wine