Question

Frank buys 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his MU from the final magazine is 10 utils while his MU from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:

Answer 1

He should investing more money on newspaper

Explanation:

Given:

• magazines cost per item: $5
• newspapers cost per item $2.50

His MU from the final magazine and final newspaper is 10 utils, so we have:

magazine = $5 / 10 utils = $0.50 per util

newspaper = $2.50 / 10 utils = $0.25 per util

He should investing more money on newspaper because twice the amount obtained from each dollar spent on newspapers than magazines as we can see above,

Hope it will find you well.

Answer 2

Let Frank spends x amount in purchasing the magazines and newspapers.(though this is not used here)

MU is marginal utility where a customer can decide a particular way to allocate his income.

This allocation is done in a way, that the last dollar spent on purchasing a product will yield the same amount of extra marginal utility.

MU from the final magazine is 10 units while his MU from the final newspaper is also 10 units.

MU per dollar spent on magazines =
`(10)/(5)=2`

MU per dollar spent on newspapers =
`(10)/(2.5)=4`

We can see the MU per dollar spent on magazine is less than newspapers.

Therefore, according to the utility-maximizing rule, Frank should re-allocate spending from magazines to newspapers.