Question

15. Cole is about to purchase 4 units of good A and 6 units of good B. The price of both A and B is $2. Cole has only $20 to spend. Assume that the marginal utility of the fourth unit of A is 8 and the marginal utility of the sixth unit of B is12. If Cole wants to maximize utility
[A] he should buy more of A and less of B.
[B] from the information given, it is impossible to determine whether or not Cole is maximizing utility.
[C] he should buy less of A and more of B.
[D] he should not buy anything.
[E] he should buy A and B in the quantities indicated.

Answer 1

Answer: Option (A) is correct.

Explanation:

Price of good A = Price of Good B = $2

Income = $20

Therefore, from the above information, the budget constraint is as follows:

2A + 2B = 20

Both goods have an intercept value of 10 with A=4 & B=6 and the slope of indifference curve shows that marginal rate of substitution (MRS) is falling. This means that as we consume more and more units of a good, the utility obtained from that good decreases.

The utility derived from good B decreases as we consume more and more units of a good, since it is in larger proximity to the intercepts value.

Therefore, the consumer will pay to purchase more of good A as compared to good B at this point.