Tim purchases cookies (C), brownies (B) and jam (J). At his current levels of consumption, his...

Tim purchases cookies (C), brownies (B) and jam (J). At his current levels of consumption, his MU_C = 10, MU_B = 15, and MU_J = 20. The price of a cookies is $2, the price of brownies is $3, and the price of jam is $4. Is the Tim maximizing his utility? If so, why? If not, what must he do to move his consumption toward equilibrium?

Solutions

Expert Solution

Utility Maximizing Condition :

In order to maximize utility a consumer should consume at the point where Marginal Utility / Price is same for all goods.

Here Goods are Jam , Brownie and Cookies.

Thus, (Marginal Utility / Price) of Cookies = MUC/PC = 10/2 = 5 , where PC = Price of Cookie.

Also, (Marginal Utility / Price) of Brownie = MUB/PB = 15/3 = 5 , where PB = Price of Brownie.

Similarly, (Marginal Utility / Price) of Jam = MUJ/PJ = 20/4 = 5 , where PJ = Price of Jam.

Thus, (Marginal Utility / Price) of Cookies = (Marginal Utility / Price) of Jam = (Marginal Utility / Price) of Brownie.

So, Marginal Utility / Price is same for all goods

Hence, he is maximizing his Utility(I have assumed that he has spent all his income that he wanted to spent)

Note :

If Marginal Utility / Price is greater for one than other then he will want more of that Good because Additional utility derived from 1 additional dollar is greater for that good and this will result in MU/P of that good because according to law of diminishing Marginal utility as you consume more of a good then MU derived from additional utility must decline. This will continue till point comes when Marginal utility / Price is same for all goods.

Rahul Sunny answered 1 week ago

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