Suppose that you are currently spending all of your income buying chicken and tofu.

Suppose that you are currently spending all of your income buying chicken and tofu. You are currently buying 5 chickens and 10 packages of tofu with your weekly income. The marginal utility of the last chicken is 1,000, and the price of chicken is $10. The marginal utility of the last package of tofu is 800, and the price of tofu is $4.

a. Are you currently maximizing your utility? How do you know, and if you are not, what should you be doing instead?

b. Explain in words why you should take the action you chose above. (HINT: what I am looking for here is for you to show why the first order condition in a utility-maximizing problem makes sense.)

Solutions

Expert Solution

b) utility is maximized when last ruppee spent on each good will give same level of satisfaction that is per unit dollar satisfaction should be same.

So MUc / Pc = MUt/Pt

Rahul Sunny answered 1 year ago

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