Question

An art student spends all of her income on pencils and drawing pads. The student currently buys 30 pencils at $1 each and 10 pads at $5 each. If the marginal utility of the 30th pencil is 100 utils and the marginal utility of the 10th pad is 400 utils, to maximize utility the student should change her purchases of pencils and pads in which of the following ways?
Pencils Pads
a. Not change Buy more
b. Buy more Buy more
c. Buy more Buy less
d. Buy less Buy more
e. Buy less Buy less

Answer 1

Answer:

The two possible ways to maximize utility are:

• c. Buy more    pencils     Buy less     pads       to increase the marginal utility of the pencils which is currently less than the marginal untility of the pads.

• d. Buy    less    pads  Buy more     pencils     , for the same previous reason: to increase the marginal utility of the pencils which is currently less than the marginal untility of the pads.

Explanation:

The maximum utility is obtained when the marginal utilities of both pencils and pads are equal.

Right now, the student is spending all his money, and obtaining different marginal utilities, thus he should change his strategy: increase the marginal utility of the pencils at the expense of decrease the marginal utility of the pads.

Then, to maximize the utility, the student must buy more pencils and buy less pads.

As per the options:

a. Not change ____  Buy more _____ does not work because to buy more of any of the items he/she must buy less of the other because the budget is covered with the current combination.

b. Buy _____  more Buy more _____ impossible for the same previous reason: the budget is covered.

c. Buy more    pencils     Buy less     pads       to increase the marginal utility of the pencils which is currently less than the marginal untility of the pads.

d. Buy    less    pads  Buy more     pencils     , for the same previous reason: to increase the marginal utility of the pencils which is currently less than the marginal untility of the pads.

e. Buy less _______ Buy less ______, does not maximize the utility because some part of the budget would not be used.