Question

A consumer is currently purchasing three pairs of jeans and five T-shirts per year. The price of jeans is $50, and shirts cost $30. At the current rate of consumption, the marginal utility of jeans is 250, and the marginal utility of shirts is 150. Based on the model of consumer choice, what should this consumer do to maximize utility

Answer 1

Answer:

This consumer should continue to maintain the current rate of consumption of purchasing three pairs of jeans and five T-shirts per year in order to continue to maximize utility since utility per dollar of the two goods are both equal to 5.

Explanation:

Under utility maximization theory for two or more goods, utility of a consumer is maximized when the ratios of marginal utility to price of each good are equal to one another. That is, utility is maximized when the utility per dollar of all the goods are equal. Any attempt by the consumer to increase or reduce the quantity of one good will not maximize his utility.

Using the pairs of jeans and T-shirts given in the question as an example, utility of the consumer is maximized when we have the following:

MUj/Pj = MUs/Ps ………………………………………………. (1)

Where;

MUj = Marginal utilities of jeans = 250

Pj = Price of jeans = $50

MUj = Marginal utilities of shirts = 150

Pj = Price of shirt = $30

Substituting the values into equation (1), we have

250/50 = 150/30

5 = 5

Since MUj/Pj = MUs/Ps is 5 = 5, it implies that the consumer is currently maximizing his utility of purchasing three pairs of jeans and five T-shirts per year. Any attempt to increase or reduce the unit of one good will not maximize his utility.

Therefore, based on the model of consumer choice, this consumer should continue to maintain the current rate of consumption of purchasing three pairs of jeans and five T-shirts per year in order to continue to maximize utility since utility per dollar of the two goods are both equal to 5.

Note

The consumer can only change increase the quantity of a good if more utility per dollar than another until when it utility diminishes to a point where its utility per dollar equal to that of the other good.