Your current consumption bundle has 5 apples and 10 oranges. Given the current level of consumption,...

Your current consumption bundle has 5 apples and 10 oranges. Given the current level of consumption, if you would consume an additional apple, you would gain 10 additional utils and if you would consume an additional orange, you would gain 20 additional utils. Given that the price of apple is $1 and the price of oranges is $0.50,

Is the Optimal Condition satisfied at the current level of consumption? Explain.

If not satisfied, what adjustment should you make and why?

Solutions

Expert Solution

Optimal condition says that marginal utility per dollar spent should be same for each good.

Here, Marginal utility per dollar spent for apples= 10/1 = 10 and

Marginal utility per dollar spent for orange = 20/0.5 = 40

Since, Marginal utility per dollar spent for orange exceeds marginal utility per dollar spent for apples, therefore, optimal condition is not satisfied at the current level of consumption.

Adjustment required:

The consumer should buy more oranges and less apples since marginal utility per dollar spent for orange exceeds marginal utility per dollar spent for apples.

Rahul Sunny answered 1 year ago

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