Question

Bridget has a budget at $100 and consumes only wine and cheese; her current consumption choice is 6 bottles of wine and 10 pounds of cheese. The price of wine is $10 per bottle, and the price of cheese is $4 per pound. The last bottle of wine added 50 units to Bridget’s utility, while the last pound of cheese added 30 units to her utility.

a. Is Bridget making the utility- maximizing choice? Why or why not?

b. If not, what should she do instead? Why?

Answer 1

a. According to theory of consumer behavior, the utiltiy- maximizing choice is to consume at the point where marginal utility of dollar from consumption of last units of both goods is equal. That is, MU$_w = MU$_c where w denotes wine and c denotes cheese.

Marginal utility of dollar = marginal utility / price of good

Therefore, MU$_w = 50/10 = 5 and MU$_c = 30/4 = 7.5

Since MU$_w < MU$_c, Bridget is not making the utiltiy- maximizing choice.

b. According to the law of diminishing marginal utility, as a consumer consumers more of a good, the marginal satisfaction derived from each additional unit goes on decreasing. Therefore, Bridget should consume more of cheese and less of wine. As she will do so, the marginal utility of cheese will keep on decreasing (thereby decreasing MU$_c) and the marginal utility of wine will keep on increasing (thereby increasing MU$w). She shoud continue doing so until the bundle is reached where MU$_w = MU$_c.