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3 years ago

7

Stella is currently spending all of her weekly income purchasing the two goods that she likes cookies and milk. She is currently

purchasing 10 cookies and 5 cartons of milk. She receives 50 utils from her 10th cookie and 25 utils from her 5th carton of milk. The price of cookies is $9, and the price of milk is $3. Is Stella maximizing her utility, and if not, what should she do?

1 answer:

Ivan3 years ago

8 0

Answer:

Stella should consume less of milk and more of cookies to maximize total utility.

Explanation:

The price of cookies is $9, and the price of milk is $3.

Stella consumes 10 cookies and 5 cartons of milk.

The marginal utility of 10th cookie is 50 utils and the marginal utility of 5th carton of milk is 25 utils.

Her total utility will be maximized if the ratio of marginal utility and price will be equal for both cookies and milk.

Ratio for cookies

= $\frac{MUx}{Px}$

= $\frac{50}{9}$

= 5.55

Ratio for milk

= $\frac{MUy}{Py}$

= $\frac{25}{3}$

= 8.33

Since the ratio is higher for milk, it means that Stella should consume less of milk and more of cookies to maximize total utility.

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