Question

Oscar makes purchases of an existing product (X) such that the marginal utility of the last unit he consumes is 10 utils and the price is $5. He also tries a new product (Y) and the marginal utility of the last unit he consumes is 8 utils and the price is $1. The equal marginal principle suggests that Oscar shoulda. increase his consumption of product X and increase his consumption of product Y.b. increase his consumption of product X and decrease his consumption of product Y.c. increase his consumption of product Y and decrease his consumption of product X.d. decrease his consumption of product Y and decrease his consumption of product X.

Answer 1

Answer:

The answer is: C) Increase his consumption of product Y and decrease his consumption of product X.

Explanation:

The equi-marginal utility principle states that a consumer will spend his money buying different goods that provide him or her the maximum possible satisfaction.

In Oscar's case, each extra unit of product X delivers 10 units of satisfaction, but product X costs $5. Instead he should buy product Y, which costs $1, and gives him 8 units of satisfaction. By consuming product Y, Oscar is getting 8 units of satisfaction per dollar spent, while he only gets 2 unit of satisfaction per dollar spent with product X.