Question

A consumer makes purchases of an existing product X such that the marginal utility is 10 and the price is $5. The consumer also tries a new product Y and at the current level of consumption it has a marginal utility of 8 and a price of $1. The utility-maximizing rule suggests that this consumer should _____?

Answer 1

Answer:

Increase the consumption of product Y and decrease the consumption of product X.

Explanation:

Utility-maximizing rule states that a consumer is maximizing its utility at a point where the marginal utility per dollar spent equal for both the products.

Marginal utility per dollar for Product X:

$\frac{MU_X}{P_X}=\frac{10}{5}$

= 2 utils per dollar

Marginal utility per dollar for Product Y:

$\frac{MU_Y}{P_Y}=\frac{8}{1}$

= 8 utils per dollar

Here, the utility-maximizing rule suggests that this consumer should consume more of product Y and less of product X.