John is currently spending 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 $2. The price of Good Y is $5. If John wants to maximize his utility he should

Question

Quizplus · Accepted Answer

To maximize utility, John should allocate his spending in a way that the marginal utility per dollar spent on each good is equal.

At the moment, the marginal utility per dollar spent on Good X is 10 utils per dollar ($2 per unit and 20 utils per unit), and the marginal utility per dollar spent on Good Y is 2 utils per dollar ($5 per unit and 10 utils per unit).

Therefore, John should increase his consumption of Good X and decrease his consumption of Good Y until the marginal utility per dollar spent on each good is equal. This will result in him achieving the highest level of satisfaction or utility based on his preferences and budget constraint.

John Is Currently Spending All of His Income