Question

Assume that product Alpha and product Beta are both priced at $1 per unit and that Ellie has $20 to spend on Alpha and Beta. She buys 8 units of Alpha and 12 units of Beta. The marginal utilities of the last unit of Alpha and Beta that she purchases are 40 utils and 20 utils, respectively.This indicates that:
a) Ellie should make no change in consumption. given another dollar,
b) Ellie should buy an additional unit of Beta. in order to maximize utility,
c) Ellie should buy more Beta and less Alpha. in order to maximize utility,
d) Ellie should buy more Alpha and less Beta.

Answer 1

Answer:

D) Ellie should buy more Alpha and less Beta.

Explanation:

Alpha product costs $1, 8 units are purchased, and the last unit purchased yields 40 utils = 40 utils per dollar spent

Beta product costs $1, 12 units are purchased, and the last unit purchased yields 20 utils = 20 utils per dollar spent.

Ellie is not maximizing her utility because she is purchasing too many betas and too few alphas. In order to increase the benefits received (utils), she must consume more alphas and less betas until the marginal utility yielded by the last unit consumed is equal for both products.