Question

Juan spends all of his income on baseball cards and candy. At his current consumption bundle, the marginal utility of baseball cards is 20 and the marginal utility of candy is 10. Assuming that diminishing marginal utility applies to both goods, if the price of baseball cards is $10 and the price of candy is $2, Juan should:
continue to consume the current bundle.
consume more candy and fewer baseball cards.
consume more baseball cards and less candy.
consume equal amounts of baseball cards and candy.

Answer 1

Answer:

Juan should consume more baseball cards and less candy.

Explanation:

Juan spends all of his income on baseball cards and candy.  

The marginal utility of baseball cards is 20 and the marginal utility of candy is 10.  

The price of baseball cards is $10 and the price of candy is $2.  

The total utility will be maximized if the ratio of marginal utility and price of a good is equal for both the goods.  

The ratio for baseball cards

= $\frac{MUx}{Px}$

= $\frac{20}{10}$

= 2

The ratio for candy

= $\frac{MUy}{Py}$

= $\frac{10}{2}$

= 5

Since, the ratio is greater for candy and lesser for baseball cards, Juan should consume more baseball cards and less candy.