Question

Robinson spends all his income on mangos and bananas. Mangos cost $3 per pound and bananas cost $1 per pound. The marginal utility is 30 for the last pound of mangos purchased and 8 for the last pound of bananas. To maximize his utility, Robinson should buy

a. only bananas.

b. more mangos and fewer bananas.

c. more bananas and fewer mangos.

d. the present combination of goods.

Answer 1

Answer to the question is option b. more mangos and fewer bananas.

Utility maximisation condition is where :-

MUm / MUb = Pm / Pb

Or , MUm / Pm = MUb / Pb

Where , MUm = marginal utility of mango

MUb = marginal utility of banana

Pm = price of mango

Pb = price of banana

Now , putting in values :-

MUm / Pm = 30 / 3 = 10

MUb / Pb = 8 / 1 = 8

Now , as MUm/Pm is greater than MUb/Pb , Robinson should buy more of mangos and fewer bananas. This will lower down MUm/Pm (that is marginal utility per price decreases as more is consumed) and will increase MUb/Pb ( marginal utility increases as less is consumed). All this happens due to the law of diminishing marginal utility. As this continues , there will be a point where equality is maintained.

As Robinson spends all his income on mangos and bananas , this process of consuming more mangos and consuming fewer bananas continues untill equality is achieved , that is untill :-

MUm/Pm = MUb/Pb

Or , MUm/MUb = Pm/Pb

That is , ratio of marginal utility equals price ratio.