Question

Assume a consumer is spending all her income on two goods: X and Y. At the current consumption combination of the two goods, if the marginal utility per dollar spent on the last unit of good X exceeds that of the marginal utility per dollar spent on the last unit of good Y, what should the consumer do to maximize utility

Answer 1

Answer:

The consumer has two options:

1. Increase the consumption of good X until its marginal utility decreases and equals the marginal utility obtained from consuming good Y.
2. Decrease the consumption of good Y until its marginal utility increases and equals the marginal utility obtained from consuming good X.

Explanation:

Both options are based on the law of diminishing marginal utility, which states that the marginal utility obtained by a consumer from a certain good or service decreases as every additional unit is consumed.

As more good X is consumed, its marginal utility will diminish. If less good Y is consumed, its marginal utility will increase.

Answer 2

Answer:

The customer should buy more of good X.

Explanation:

Marginal utility is the additional satisfaction derived from spending an additional unit of money on a commodity.

In the scenario above, since more additional satisfaction is derived from purchasing good X than it is derived from purchasing good Y, then more of good X should be purchased, because this is clearly the commodity that offers more satisfaction.

Therefore, in order for utility to be maximized, more money should be spent on more of good X.