In: Economics
Tim purchases cookies (C), brownies (B) and jam (J). At his current levels of consumption, his MUC = 10, MUB = 15, and MUJ = 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?
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.