When a person consumes two goods (A and B), that person's utility is maximized when the budget is allocated such that:Group of answer choicesthe marginal utility of A equals the marginal utility of B.the marginal utility of A times the price of A equals the marginal utility of B times the price of Bthe ratio of total utility of A to the price of A equals the ratio of the marginal utility of B to the price of B.the ratio of the marginal utility of A to the price of A equals the ratio of the marginal utility of B to the price of B.
Question
When a person consumes two goods (A and B), that person's utility is maximized when the budget is allocated such that:Group of answer choicesthe marginal utility of A equals the marginal utility of B.the marginal utility of A times the price of A equals the marginal utility of B times the price of Bthe ratio of total utility of A to the price of A equals the ratio of the marginal utility of B to the price of B.the ratio of the marginal utility of A to the price of A equals the ratio of the marginal utility of B to the price of B.
Solution
The correct answer is "the ratio of the marginal utility of A to the price of A equals the ratio of the marginal utility of B to the price of B."
Here's why:
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Utility is a measure of the satisfaction or happiness that a consumer gets from consuming goods or services.
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Marginal utility is the additional satisfaction that a consumer gets from consuming one more unit of a good or service.
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According to the principle of utility maximization, a consumer allocates their budget between two goods in such a way that the last dollar spent on each good provides the same amount of additional (marginal) satisfaction.
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In other words, the ratio of the marginal utility to the price should be the same for both goods. If it were not, the consumer could increase their total satisfaction by buying more of the good with the higher ratio and less of the good with the lower ratio.
So, the correct answer is "the ratio of the marginal utility of A to the price of A equals the ratio of the marginal utility of B to the price of B."
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