Question

Stan is choosing between two goods, candy bars and sodas, and his marginal utility from each is as shown in the table. stan's daily income is $11, the price of a candy bar is $2, and the price of a soda is $1. which consumption bundle will maximize his utility, given this budget constraint?

Answer 1

Answer: Stan will buy 3 units of Candy bars and 5 units of Soda.

Explanation:

The optimal consumption bundle s given by the point where the indifference curve is tangent to the budget line. At this point, the slope of the indifference curve is equal to the slope of the budget line.

That is

$\frac{MRSc}{MRSs} = \frac{Pc}{Ps}$

$\frac{MUc}{Pc} =\frac{MUs}{Ps}$

This marginal utility per dollar is equal for consumption bundles,

1 unit of candy bar, 4 units of soda = Total expenditure = $6 < Income. Thus not optimal

3 unit of candy bar, 5 units of soda = Total expenditure = $11 = Income. Thus optimal bundle

5 unit of candy bar, 6 units of soda = Total expenditure = $16 > Income. Thus not optimal

7 unit of candy bar, 7 units of soda = Total expenditure = $21 > Income. Thus not optimal

Therefore, 3 units of candy bars and 5 units of soda is the only optimal bundle which utilizes  all the income to maximize consumption.