Question

Charley spends all of his income on soft drinks and pizza. Suppose he is currently buying these products in amounts such that his marginal benefit from an additional soft drink is $ 90 and his marginal benefit from an additional slice of pizza is $ 50. If the price of a soft drink is $ 2 and the price of a slice of pizza is $ 5, is Charley maximizing his total benefits?

a) No, he should increase his consumption of both goods.
b) No, he should shift consumption toward soft drinks and away from pizza to maximize total benefits.
c) Yes, there is no other consumption choice that will make his total benefits greater.
d) No, he should shift consumption toward pizza and away from soft drinks to maximize total benefits.

Answer 1

The correct answer is option d.

Step-by-step explanation:

In consumption of two or more goods, the total utility is maximized when the ratio of marginal utility derived from consumption and price of good is equal for all goods.

Here, marginal benefit from an additional soft drink is $90 and marginal benefit from an additional slice of pizza is $50.

The price of a soft drink is $2 and the price of a slice of pizza is $5.

The ratio of marginal utility and price for soft drinks

= $90/$2

= 45

The ratio of marginal utility derived and price of product for pizza is

= $50/$5

= 10

Since it is higher for soft drinks, to maximize benefits Charlie should shift spending from soft drinks towards pizza.