Question

Ken consumes two goods, Sprite and potato chips. Sprite costs $1 per can, and he consumes it to the point where the marginal utility he receives from his last Sprite is 3. Potato chips cost $2 per bag, and the relationship between the marginal utility he gets from eating a bag of potato chips and the number of bags he eats per month is as follows:
Bags of Potato chips 1 2 3 4 5 6
Marginal utility 30 20 12 6 2 0

Required:
If Ken is maximizing his utility, how much does he spend on potato chips each month?

a. $2
b. $6
c. $8
d. $10
e. $12

Answer 1

Answer:

The correct option is c. $8.

Explanation:

Ken will maximize utility where the following equation holds:

MU of Sprite / Price of Sprite = MU of potato chips / Price of potato chips ................. (1)

Where;

MU of Sprite = Marginal utility of Sprite = 3

Price of Sprite = $1 per can

From the table in the question, equation (1) holds at the point where Marginal utility of potato chips is 6 since the Potato chips cost $2 per bag.

Substituting the values into equation (1), we have:

MU of Sprite / Price of Sprite = MU of potato chips / Price of potato chips => 3 / 1 = 6 / 2 = 3

Since when the marginal utility of potato chips that maximizes utility is 6, Ken consumes 4 Bags of Potato chips monthly and pays $2 per bag at this point, the amount he spends on potato chips each month can be calculated as follows:

Amount spent on potato monthly = Number of bags of Potato chips consumed monthly * Cost of potato chips per bag = 4 * $2 = $8

Therefore, the correct option is c. $8.