Question

Bobby consumes only ice cream and cookies and he is spending all of his income. Currently, he is spending his income in such a way that his marginal utility of ice cream is 100 units of utility and his marginal utility of cookies is 150 units of utility. The price of ice cream is $1.00 per scoop and the price of a cookie is $2.00. To maximize his utility, Bobby should _____.(A) buy no ice cream.(B) not change his purchases of ice cream and cookies.(C) buy more ice cream and fewer cookies.(D) buy more cookies and less ice cream.

Answer 1

Answer: (D) buy more ice cream and fewer cookies

Explanation: When a consumer spends all of his income and consumes a bundle of goods such that the marginal utility per dollar from all goods is equal, then the consumer's total utility is maximized. Buying more of ice-cream gives the only combination that gives him the same marginal utility per dollar Bobby spends on cookies as on ice cream.

Marginal utility estimates the added satisfaction a consumer gets from consuming additional units of goods or services. It is used to determine how much of a product consumers are willing to purchase.