Question

Given a set amount of money, goods A and B both give the same marginal utility but good A costs twice as much as good B. If you were a rational economic agent you would:

Answer 1

Answer:

The correct answer is letter "B": consume more of good B and less of good A.

Explanation:

Marginal Utility is a common economic term referring to the extra benefit or satisfaction obtained by buying one additional unit of a good or service. Something has utility in economics if it meets any consumer desire or needs, whether for use or pleasure. People buy when the marginal utility is greater than the marginal cost, and when the marginal utility is less than the marginal cost, they do not.

Thus, if good A is twice the price of good B both having the same marginal utility, good B should be consumed more because good A marginal utility is less than its marginal cost compared to good B.