Question

Connie the consumer frequently buys both coffee and tea at the OU Library store. Theprice of coffee is $3.00 while the price of tea is $2.00. If we assume Connie is making optimalconsumption choices and we know she purchases positive quantities of both goods, what canwe infer about the relationship between the marginal utility Connie obtains from her lastpurchase of coffee compared to the marginal utility obtained from her last purchase of tea

Answer 1

Answer / Explanation:

Before answering this question, let us understand some terms used in the narrative:

Marginal Utility: Utility in itself can be refereed to as the satisfaction derived from the consumption of a particular good or service. However, when we now becomes a marginal utility, it mean we are now paying attention to the level of change in the extra level of satisfaction derived from the particular good and service.

Optimal Consumption: This can be referred to as one of the guiding principle of consumption in an economy, it stipulates that when a consumer maximizes utility or attain maximum satisfaction, the marginal utility per amount spent must be the equal all goods and services in the same class of goods..

In summary it is a state of mind or feeling that people get a certain level of joy utility from consuming goods and service while Marginal utility is the benefit of consuming an extra unit of that product.

Now referring back to the question and answering it,

If Connie is making optimal consumer choices, the ratio of marginal utility to the price should be the same for both goods. Hence, the price of coffee is 3/2 as much and these ratios are equal and the marginal utility of coffee must be = 3/2 as high as that of tea at the quantities she is purchasing them at.