Question

Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his MU from the final magazine is 10 utils while his MU from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:
Reallocate spending from magazines to newspapers.
Reallocate spending from newspapers to magazines.
Be satisfied because he is already maximizing his total utility.
None of the above.

Answer 1

Answer:

Reallocate spending from magazines to newspapers.

Explanation:

While each unit generates additional revenue it is important to notice the utility per dollar:

magazines utility per dollar:

10/5 = 2 utilities per dollar

newspaper utility per dollar:

while from newspaper 10 / 2.5 = 4 utilities per dollar

as newspapper utility is greater it should reallocate into it

Answer 2

Answer:

Reallocate spending from magazines to newspapers.

Explanation:

We are only given the utility provided by the last newspaper and the last magazine, but in order to answer the question I will consider that the utility remains the same from the first to the last unit.

Frank obtains 10 utils from purchasing each magazine and each newspaper:

• magazine = $5 / 10 utils = $0.50 per util
• newspaper = $2.50 / 10 utils = $0.25 per util

Frank obtains twice the utils from each dollar spent on newspapers than on magazines, so he should spend more money on newspapers.