Question

Units of Product	Marginal Utility, X (Price = $1)	Marginal Utility, Y (Price = $1)	Marginal Utility, New Product, Z (Price = $1)
First	12	16	20
Second	10	14	18
Third	8	12	16
Fourth	6	10	14
Fifth	4	8	12
Sixth	2	6	10
Seventh	0	4	8

Refer to the data for a consumer whose income = $12. Assume new product Z is introduced. How many units of Z will this consumer buy, given his or her $12 budget?

Multiple Choice

• zero units

• 2 units

• 4 units

• 6 units

Answer 1

6 units

Explanation:

firm maximizes its utilitiy where, Marginal utitlity per dollar are equal.

MUX/PX=MUY/PY=MUZ/PZ

here for evry product price is $1, so marginal utitlity per dollar will be same as marginal utiltiy of each product.

which ever good has higher marginal utiltiy per dollar, first he will buy that product.

first he will buy 3 unit of z becuase it has higher marginal utility per dollar and then will buy the 1 unit of Y. then 1 unit of y and z product as they have same marginal utility per dollar. and then we will buy 1 unit of each product as they have same marginal utility per dollar.

now if we reduce the cost of that product from $12 income we have left

5 unit of z, 3 unit of y and 1 unit of x, so toatal cost will be=5+3+1=9

still we have left the $3 to spend.(12-9)

now we will spend it to all three unit as they have same marginal utitlity per dollar.

so now we will buy the 5+1=6 unit of z

3+1=4 unit of y and 1+1=2 unit of X.