Question

Monica consumes only goods A and B. Suppose that her marginal utility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of A is $0.50, the price of B is $4.00, and the Monica's income is $120.00, how much of good A will she purchase?

Answer 1

Answer: The answer is 120.

Explanation: We know that consumer balance occurs when:

Marginal utility of A / Price of A = Marginal utility of B / Price of B

And we know that the budget restriction is: 120 = 0.5Qa + 4Qb

So the consumer balance is:

1 / 0.5Qa = 1 / 4Qb

0.5Qa = 4Qb

Qa = 4 / 0.5 Qb

Qa = 8Qb

We replace:

120 = 0.5Qa + 4Qb = 4Qb + 4Qb = 8Qb

Qb = 120/8 = 15

Qa = 8Qb = 15 * 8 = 120