For a consumer, the marginal utility of good A is 25 and its price is $5. The marginal utility of good B is 60 and its price is $12. The consumer has allocated his entire budget. Is this consumer maximizing his total utility? Explain your answer
Question
For a consumer, the marginal utility of good A is 25 and its price is 12. The consumer has allocated his entire budget. Is this consumer maximizing his total utility? Explain your answer
Solution
To determine if the consumer is maximizing his total utility, we need to compare the marginal utility per dollar spent on each good.
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First, calculate the marginal utility per dollar for each good. This is done by dividing the marginal utility of the good by its price.
For good A: 25 MU/12 = 5 MU per dollar
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Compare the marginal utility per dollar for each good. If they are equal, then the consumer is maximizing his total utility. If they are not equal, then the consumer could increase his total utility by reallocating his budget.
In this case, the marginal utility per dollar is equal for both goods (5 MU per dollar). Therefore, the consumer is maximizing his total utility.
This is based on the principle of equi-marginal utility, which states that consumers maximize their total utility when the marginal utility per dollar spent is the same for all goods and services.
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