John is going to spend all of his income. For the last unit of Good X consumed John gets 20 utils and for the last unit of Good Y consumed he gets 10 utils. The price of Good X is $1. The price of Good Y is $10. If John wants to maximize his utility he should

Question

Quizplus · Accepted Answer

To maximize his utility, John should continue consuming goods until the marginal utility per dollar spent on each good is equal.

For Good X: MUx/Px = 20/1 = 20
For Good Y: MUy/Py = 10/10 = 1

Since John is spending all of his income, his total expenditure must be equal to his total income.

Let the quantity of Good X consumed be x and the quantity of Good Y consumed be y.
Then, the equation for John's budget constraint is: Px x + Py y = I

John can rewrite this equation as: x + 10y = I

To maximize his utility, John should allocate his spending such that the marginal utility per dollar spent is equal for both goods. Currently, MUx/Px = 20 > MUy/Py = 1, which means he should increase consumption of Good X and decrease consumption of Good Y until he reaches the point where MUx/Px = MUy/Py.

Therefore, the best choice is B, to increase the consumption of Good X and decrease the consumption of Good Y.

John Is Going to Spend All of His Income