Ms.Birnbaum is buying bottles of beer and bags of pretzels.The marginal utility of the last bottle of beer is 60 and the marginal utility of the last bag of pretzels is 30.The price of beer is $0.30 per bottle and the price of pretzels is $0.20 per bag.Ms.Birnbaum
A)is buying beer and pretzels in the utility-maximizing amounts.
B)should buy more beer and fewer pretzels.
C)should buy more pretzels and less beer.
D)is not spending all her income.

Question

Quizplus · Accepted Answer

To maximize utility, the consumer should equalize the marginal utility per dollar spent across all goods. Here, the marginal utility per dollar for beer is 60/0.30 = 200, and for pretzels, it is 30/0.20 = 150. Since the marginal utility per dollar is higher for beer, Ms. Birnbaum should buy more beer and fewer pretzels to reach the utility-maximizing combination.

MsBirnbaum Is Buying Bottles of Beer and Bags of Pretzels