Question

Suppose you have a monthly entertainment budget that you use to rent movies and purchase CDs. You currently use your income to rent 5 movies per month at a cost of $5.00 per movie and to purchase 5 CDs per month at a cost of $10.00 per CD. Your marginal utility from the fifth movie is 50 and your marginal utility from the fifth CD is 96. Are you maximizing utillty? You are ? A. maximizing utility because you are consuming an equal number of movies and CDs B. not maximizing utility because the marginal utility per dollar spent on movles is not equal to the marginal utility per dollar spent on CDs C. not maximizing utility because the marginal utity of movies is not equal to the marginal utility of CDs. D. maximizing utility because you are spending all of your entertalnment budget. E, not maximizing utility because the price of movies is not equal to the price of CDs.

Answer 1

Answer:

B. not maximizing utility because the marginal utility per dollar spent on movies is not equal to the marginal utility per dollar spent on CDs

Explanation:

Consumer is at utility maximising equilibrium in case of two goods consumption,  when Marginal Utility per unit of dollar spent on each good is equal , i.e :

MU (G1) / P (G1) = MU (G2) / P (G2) , where  ;

MU (G1) = Marginal Utility of Good 1 , MU (G2) = Marginal Utility of Good2 , P (G1) = Price of Good 1 , P (G2) = Price of Good 2

If Marginal Utility per unit of dollar spent on any good is higher than other , it is beneficial (utility maximising) for consumer to increase consumption of good having higher MU/P .

Given:  MU (Movie) = 50, P (Movie) = 5 , MU (CD) = 96, P (CD) = 10. MU (Mov) / P (Mov) i.e 50/5 = 10 > MU(CD) / P(CD) i.e 96 / 10 = 9.6

Since consumer's MU per unit of dollar spent is not equal for both goods , consumer is not at utility maximising equilibrium.