Question

Assume you are spending your full budget and purchasing such amounts of X and Y that the marginal utility from the last units consumed is 40 and 20 utils respectively. Assume (a) the prices of X and Y are $8 and $4 respectively; (b) it takes 3 hours to consume a unit of X and 1 hour to consume a unit of Y; and (c) your time is worth $2 per hour. You therefore:_____________.1. should subtitute X for Y until the marginal utility per hour is the same for both products.2. are consuming X and Y inthe optimal amounts3. should consume less of Y more of X4. should consume more of X less of Y

Answer 1

Answer: The answer is that you should consume less of X and more of Y.

Explanation: From the scenario presented above, we see that X gives 40 utils and it costs $8. Y gives 20 utils and it costs $4.

But since it takes 3 hours to consume X, and just 1 hour to consume Y, bearing in mind that 1 hour is equivalent to $2, then an additional $6 cost is incurred in consuming X, while an additional $2 cost is incurred in consuming Y.

Therefore the total cost incurred in consuming X and Y are:

X = $14

Y = $6

In order to determine the correct consumption combination, we will have to calculate the utility per dollar spent on each product thus:

Utility per dollar spent on X = 40/14

= 2.86

Utility per dollar spent on Y = 20/6

= 3.33

From the calculations above, we can see that more utility is derived from consuming Y than from consuming X.

Therefore, less of X should be consumed and more of Y should be consumed.

Answer 2

Answer:

4. should consume less of X and more of Y.

Explanation:

Marginal Utility is defined as the satisfaction that an individual gains after consuming additional units of a certain goods or services.

In  the given scenario there are two products X and Y. The price of X is higher than Y. The product X takes more time to consume than of product Y. The consumer should make a combination to maximize its marginal utility. The time to consume a unit worth $2 per hour therefore the consumer should focus consuming more of Y and less of X to save its time to consume the unit which will result in maximizing its marginal utility.