Question

The following two schedules show the amounts of additional satisfaction (marginal utility) that a consumer would get from successive quantities of products A and B.

Instructions: Enter your answers as whole numbers.

Units of Good A MU of Good A Price of A = $6 MU/P for A Units of Good B MU of Good B Price of B = $4 MU/P for B 1 75 1 34 2 63 2 30 3 51 3 26 4 39 4 22 5 27 5 18 6 15 6 14 7 3 7 10 a. The consumer has a money income of $22. To maximize utility, this consumer should purchase: unit(s) of good A and unit(s) of good B. b. Now suppose the price of good A rises to $10. For the same money income, the consumer should now purchase: unit(s) of good A and unit(s) of good B.

Answer 1

Ans:

a)

3 units of good A and 1 unit of good B

To maximize utility, the consumer should purchase 3 units of good A and 1 unit of good B

Explanation

In order to maximize utility, the decision should be based on marginal utility per dollar spent.

marginal utility per dollar = marginal utility / price

Table showing marginal utility per dollar for good A

units of good A	marginal utility	marginal utility per dollar = marginal utility / $6
1	75	12.5
2	63	10.5
3	51	8.5
4	39	6.5
5	27	4.5
6	15	2.5
7	3	0.5

Table showing marginal utility per dollar for good B

units of good B	marginal utility	marginal utility per dollar = marginal utility / $4
1	34	8.5
2	30	7.5
3	26	6.5
4	22	5.5
5	18	4.5
6	14	3.5
7	10	2.5

b)

1 unit of good A and 3 units of good B

To maximize utility, the consumer should purchase 1 unit of good A and 3 units of good B

Explanation

Table showing marginal utility per dollar for good A, when the price of good A rises to $10.

units of good A	marginal utility	marginal utility per dollar = marginal utility / $10
1	75	7.5
2	63	6.3
3	51	5.1
4	39	3.9
5	27	2.7
6	15	1.5
7	3	0.3