Question

Bill currently uses his entire budget to purchase 5 cans of Pepsi and 3 hamburgers per week. The price of Pepsi is​ $1 per​ can, the price of a hamburger is​ $2, Bill's marginal utility from Pepsi is​ 4, and his marginal utility from hamburgers is 6.
Bill could increase his utility by:

A. maintaining his current consumption choices.
B. increasing Pepsi consumption and reducing hamburger consumption.
C. increasing hamburger consumption and reducing Pepsi consumption.
D. We do not have enough information to answer this question.

Answer 1

Answer:

Option (B) is correct.

Explanation:

The utility maximization point for a consumer is as follows:

$\frac{MU_x}{P_x}=\frac{MU_y}{P_y}$

It is given that,

price of Pepsi(x) =​ $1 per can

price of a hamburger(y) =​ $2

Marginal utility from Pepsi =​ 4

Marginal utility from hamburgers = 6

Hence,

$\frac{4}{1}>\frac{6}{2}$

4 > 3

Therefore, it can be seen that the consumer's utility is not maximized at this point.

Law of diminishing marginal utility states that as the consumer consumes more and more quantity of goods then as a result the utility obtained from the consumption goes on diminishing.

So, there is a need to increase the quantity of Pepsi consumed and reducing the quantity of hamburgers consumed.