Question

Bill currently uses his entire budget to purchase 5 cans of Pepsi and 3 hamburgers per week. The price of Pepsi is $2 per can, the price of a hamburger is $2, Bill's marginal utility from Pepsi is 4, and his marginal utility from hamburgers is 6. Bill could increase his utility by:

A. increasing hamburger consumption and reducing Pepsi consumption.

B. increasing Pepsi consumption and reducing hamburger consumption.

C. maintaining his current consumption choices.

D. We do not have enough information to answer this question.

Answer 1

Bill's budget = (2*5)+(2*3)

=10+6 = $16

Now if the budget is Dollar 16 the following combinations of Pepsi and hamburgers can be purchased using the above amount.

Combination	Pepsi	Hamburger	Total Utility
A	8	0	8*4 = 32
B	7	1	28+6 = 34
C	6	2	24+12 =36
D	5	3	20+18=38
E	4	4	16+24=40
F	3	5	12+30=42
G	2	6	8+36=44
H	1	7	4+42=46
I	0	8	8*6=48

Currently the consumer is at combination D and as we can see in the above table as he moves towards combination e, f ,g, h, i where he is reducing the the consumption of Pepsi and increasing the consumption of hamburger, his total utility is increasing. Thus the correct option is option A where increasing hamburger consumption and reducing  Pepsi consumption can increase his utility. The reason for this is the difference in marginal utilities of both the goods where hamburger has a higher marginal utility in comparison to Pepsi, however the prices of both the goods are same.