What is an opportunity cost
1 answer:
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Answer:
Paul is NOT maximizing his utility.
Explanation:
Given:
MU = Marginal utility from DVDs = 21
MU = Marginal utility from books = 4
P = Price of DVDS = $11
P = Price of books = $1
Under the utility maximization theory for two or more goods, utility is said to be maximized by a consumer when the ratios of the marginal utility to price per unit of each good are equal to each other. For this question, this implies that when we have:
MU / P
= MU
/ P
………………………….. (1)
Therefore, we have:
MU / P
= 21 / 11 = 1.91
MU / P
= 4 / 1 = 4
Since 1.91 = MU / P
< MU
/ P
= 4, this implies that these conditions are NOT consistent with equation (1). Therefore, Paul is NOT maximizing his utility.
In order to maximize his utility, Paul should consume more DVDs and consume less books until these conditions are consistent with equation (1).