Question

Assume that a consumer purchases a combination of products. Product A is an old and reliable product. Product B is a new and appealing product. The MU_a/P_a = 40 and MU_b/P_b = 45. To maximize utility without spending more money, the consumer should

		purchase less of A and more of B.
		make no change in A and B.
		purchase more of A and less of B.
		purchase more of both A and B.

Answer 1

The consumer will purchase quantities of goods A and B so as to completely exhaust the budget set ie the income is the constraint for consumption The actual quantities purchased of each good are determined by the condition for consumer equilibrium, which is

(marginal utility of good a/ price of good a)=(marginal utility of good b / price of good b) ......1

since we are given MUa/Pa = 40 and MUb/Pb = 45 which implies MUa/Pa <MUb/Pb

so since we have the prices as given , to fulfill the condition of equilibruim as in equation 1 we chnage the marginal utility of goods, good A has less marginal utility to price ratio. so we need to decrease the marginal utility of good b . the law of Diminishing marginal utility states that as we consume more of a good , the utility derived from it reduces, so in order to equate the MuA/pa and MUb / Pb we need to increase the consumption of good b so that the marginal utility ie the utility derived from consumption of additional unit of good b refuces and the good gives us less value which would reduce the ,marginal utility siunce the price is already given and cant ne changed. also we can purchyase less of good a so that the marginal utility remains sam eor increases since the less the good a would be consumed more would be the marginal utility derived from it .

so we need to purchase less of good A and more of good B in order to fulfill the equilibruim of

MUa/Pa= MUb/Pb and maximise utility with given income

so option A is appropriate.