Let the price be $1 and the price of be $0.50. original income is $5. originally buys 3 units of and 4 units of and uses up all of her income. At these levels the marginal utility of for her is 4 and marginal utility of for her is 2. Is she at an optimal solution?

Business · High School · Mon Jan 18 2021

Answered on

To determine if she's at an optimal solution, let's start by calculating the marginal utility per dollar for each good.

The formula for marginal utility per dollar is: Marginal Utility / Price

For good :

Marginal utility of / Price of = 4 / $1 = 4

For good :

Marginal utility of / Price of = 2 / $0.50 = 4

Given that the marginal utility per dollar for both goods is the same (4), she is maximizing her utility for each dollar spent on both goods. This suggests that she is currently at an optimal solution given her preferences and the prices of the goods.


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