Question

Sharon purchases two products, X and Y, with a given fixed budget. The marginal utility she receives from the last unit of X she consumes is 60 utils, and the marginal utility she receives from the last unit of Y she consumes is 30 utils. The price of X is $2.00 and the price of Y is $1.00. Based on the equal marginal principle, these data suggest that Sharon
A) is maximizing her total utility from the given fixed budget.
B) should buy more X and less Y.
C) should buy more Y and less X.
D) should buy less Y and X.

Answer 1

Answer:

The correct answer is option A.

Explanation:

Sharon in consuming two goods X and Y.  

The price of X is $2 and that of Y is $1.  

The marginal utility derived from consuming X is 60 utils and from consuming Y is 30 utils.  

For profit-maximization the ratio of marginal utility and price should be equal for both goods or the marginal utility of money spent on both goods should be equal.  

The ratio for good X

= $\frac{MUx}{Px}$

= $\frac{60}{2}$

= 30  

The ratio for good Y

= $\frac{MUy}{Py}$

= $\frac{30}{1}$

= 30  

Since the ratio is same for both the goods it implies that Sharon is maximizing her total utility.