As a graduate student, Ed has a fixed food budget and consumes only two items: ramen...

As a graduate student, Ed has a fixed food budget and consumes only two items: ramen noodles and pizza. Given his current consumption levels, Ed’s marginal utility for a package of ramen noodles is 50 utils, while his marginal utility for a slice of pizza is 150 utils. The price of a package of ramen noodles is $0.25 and the price of a slice of pizza is $1.50. How can Ed increase his total utility and reach a higher indifference curve? Explain your reasoning

Solutions

Expert Solution

According to utility maximizing condition a consumer should choose than quantity of X and Y such that MU_p/P_p = MU_n/P_n

where MU represents Marginal utility and P represents price

Here Let Pizza be denoted by p and Ramen Noodles by n.

according to utility maximizing condition: MU_p/P_p = MU_n/P_n

Here MU_p = 150 , P_p = 1.5 , MU_n = 50 P_n = 0.25

Here MU_p/P_p = 150/1.5 = 100

and MU_n/P_n = 50/0.25 = 200

=> MU_n/P_n > MU_p/P_p

Hence In order to equalize this MU_n/P_n should decrease and MU_p/P_p should increase.

According to law of diminishing marginal utility , Marginal Utility of good X decreases as we increase the consumption of Good X.

Hence, In order to MU_n/P_n to decrease we have to increase the consumption of Ramen Noodles and MU_p/P_p to increase we have to decrease consumption of Pizza.

Hence, Ed can increase his total utility and reach a higher indifference curve If he increases consumption of Ramen Noodles and decrease consumption of Pizza.

Rahul Sunny answered 1 year ago

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