Question

A consumer currently spends a given budget on two goods, X and Y, in such quantities that the marginal utility of X is 10 and the marginal utility of Y is 8. The unit priceof X is $5 and the unit price of Y is $2. The utility-maximizing rule suggests that this consumer should __________.a. Increase consumption of product X and decrease consumption of product Y.b. Increase consumption of product X and increase consumption of product Y.c. Increase consumption of product Y and decrease consumption of product X.d. Stick with the current consumption mix because it yields maximum utility.

Answer 1

Answer:

The correct answer is option c.

Explanation:

According to the utility-maximizing rule, a consumer is able to maximize utility through the consumption of two commodities if the ratio of marginal utility derived from the consumption of last unit and the price of the product is the same for both the goods.  

This implies that the marginal utility of the last dollar spent on the consumption of both goods is the asame.  

Here, the marginal utility of good X is 10 and the marginal utility of good Y is 8.  

The price of good X is $5 and the price of good Y is $2.  

The marginal utility of last dollar spent on good X is

= $\frac{MUx}{Px}$

= $\frac{10}{5}$

= 2

The marginal utility of last dollar spent on good Y is

= $\frac{MUy}{Py}$

= $\frac{8}{2}$

= 4

Since the marginal utility of last dollar spent is greater for good Y and smaller for good X, so to equate both, the consumer should consume more of good Y and less of good X.