Peter consumes bags of potato chips and cans of soft drink. The marginal utility of bags of potato chips is 10 utils per bag and the marginal utility of cans of soft drink is 50 utils per can. Potato chips cost $0.50 a bag, and a can of soft drink costs $1.00. What should Peter do?

Question

Quizplus · Accepted Answer

To maximize utility, Peter should equalize the marginal utility per dollar spent on each good. The marginal utility per dollar for potato chips is 20 utils per dollar (10 utils/$0.50), and for soft drinks, it is 50 utils per dollar (50 utils/$1.00). Since the marginal utility per dollar is higher for soft drinks, Peter should buy more soft drink and fewer potato chips.

Peter Consumes Bags of Potato Chips and Cans of Soft