Question

Suppose you have a fixed amount of income and spend equal amounts on two goods, X and Y. The price of good X is Px = $10, and the price of good Y is Py = $5. The marginal utility of X is MUx = 60 utils, and the marginal utility of Y is My = 15 utils. How should the consumption of X and Y change, if at all, to increase utility

Answer 1

More of good Y should be consumed to increase total utility.

Step-by-step explanation:

The price of good X is Px = $10, and the price of good Y is Py = $5.

The marginal utility of X is MUx = 60 utils, and the marginal utility of Y is My = 15 utils.

The total utility from the consumption of the two goods will be maximized when the ratio of the marginal utility from last unit and the price of the good will be equal for both the goods.

The ratio for good X

=
`/frac{60}{10}`

= 6

The ratio for good Y

=
`/frac{15}{5}`

= 3

Since the ratio is greater for good X, the consumption should shift from good X to good Y in order to maximize utility.