Question

Suppose Paul has chosen a combination of two goods, A and B, such that the marginal utility per dollar spent for good A (MU A/P A) is .6 and the marginal utility per dollar spent for good B (MU B/P B) is 1. To increase utility with the same amount of money, Paul should:

Answer 1

Answer: Increase the number of B consumed and decrease the number of A consumed.

Explanation: The utility maximization rule basically states that if the marginal utility gained from product A is greater than the marginal utility gained from product B, then more of product A should be consumed and less of product B should be consumed in order to maximize the utility per unit of money spent.

Therefore, in order for Paul to increase utility with the same amount of money, he should increase spending on the product that offers the higher marginal utility, meaning that he should spend more on the product that offers more satisfaction.

The product that offers more satisfaction in the scenario above is product B, because its marginal utility per dollar is 1, which is greater then the marginal utility of product a of 0.6 marginal utility per dollar.

Hence, Paul should increase consumption of product B and decrease consumption of product A.