Question

Jennifer is trying to decide between a cup of coffee and a glass of orange juice. The coffee costs $1 and yields 10 units of additional utility. The juice costs $2 and yields 16 units of additional utility. If Jennifer follows the principle of rational choice, she will buy:
1)coffee since it is cheaper
2)juice since she likes it better
3)coffee since it gives her the most marginal utility per dollar
4)juice since it gives her the most marginal utility per dollar

Answer 1

Answer:

3) coffee since it gives her the most marginal utility per dollar

Explanation:

Utility refers to the satisfaction expressed in utils which a consumer derives post consuming a unit of a product.

Marginal utility refers to the addition to total utility derived upon consumption of an extra unit of a product. It is expressed as:

$MU = TU_{x} \ -\ TU_{x\ -\ 1}$

where MU= Marginal Utility

           TU= Total Utility

            x =  no of units consumed

In the given case, marginal utility per unit of $ would be;

For coffee: 10 units per dollar

For Juice: 16units/$2 i.e 8 units per dollar.

As is evident, marginal utility per dollar of coffee is higher so she should prefer buying coffee.