Question

Suppose a consumer has $150 to be spent on either books or video games. Video games cost $50 each and books cost $10 each. The consumer decides to buy 2 video games and 5 books. The marginal utility of the 2nd video game is 100, and the marginal utility of the 5th book is 80. Did this consumer follow the utility maximizing rule? Group of answer choices

Answer 1

Answer:

The consumer is not currently following utility maximising rule

Explanation:

A two commodity consuming consumer , is at utility maximising equilibrium, as per cardinal utility, when :

MU G1 / P G1 = MU G2 / P G2  ; where

MU G1 , PG1 & MU G2 , P G2 are marginal utilities & prices of good 1 & good 2 respectively.

Such because if Marginal Utility per unit price of any good is  comparatively more than other, the consumer will consumer more of it & MU of that good will fall until equilibrium equality condition is restored.

Putting in formula, Given : MU G1 = 100 , P G1 = 50 , MU G2 = 80 , P G2 = 10 { Considering Video game as good 1 , books as good 2 }

[ 100 / 50 = 2 ] < [ 80 / 10 = 8 ]

So , Additional satisfaction pe unit price spend is not equal for both goods - videos & books. It is more for books. Hence , the consumer is not currently following utility maximising rule [is not at equilibrium].