Question

Alex has allocated his income in such a way that the marginal utility of the last unit of product X he consumes is 40 utils and that of the last unit of Y is 16 utils. If the unit price of X is $5, then the price of Y must be ________.
A. $1 per unit.
B. $2 per unit.
C. $3 per unit.
D. $4 per unit.

Answer 1

Answer:

The price of product Y is B) $2 per unit.

Explanation:

Marginal utility is the satisfaction derived from the consumption of an additional unit of a product or commodity. When calculating for the utility maximization, one has to consider four things;- The products or commodities in question as well their different prices. The utility maximization is calculated using the formula; MU(X) ÷ P(X) = MU(Y) ÷ P(Y). MU(X) and P(X) here represents marginal utility of product X and price of X  respectively while MU(Y) and P(Y) represents marginal utility of Y and price of product Y respectively. This is thus solved without the price of Y. So, P(Y) is an unknown assumed as A.

Therefore, MU(X) ÷ P(X) = MU(Y) ÷ P(Y) is replaced with figures; 40 utils ÷ $5 = 16 utils ÷ $A

Using cross multiplication, we have 40A = 80; A = 80 ÷ 40 = 2

Therefore. $2 per unit is the price of product Y