Question

Assume your consumption this week included chicken and steak. the marginal utility of chicken is 12 and chicken costs $7. while the marginal utility of steak is18. while steak costs $ 9. should you change your consumption next week to increase/maximize your utility? explain.

Answer 1

At the optimal point, the marginal utility per unit of dollar spent on each good must be the same

For chicken, MUchicken / Pchicken = 12/7 = 1.72

For steak, MUsteak / Psteak = 18/9 = 2

Since, the marginal utility per dollar is higher for steak than chicken, this is not the utility maximization point. Thus, the consumer should increase his consumption of steak relative to chicken. This will decrease the marginal utility of steak and should be continued until the marginal utility per unit of dollar spent is same for chicken and steak.