Question

Jessica spends all her income on two goods, A and B. The price of A is $5, and the price of B is $7. At the current consumption bundle, the marginal utility of A is 10, and the marginal utility of B is 21. To maximize utility given her income, Jessica should:_____________

Answer 1

Jessica should consume more of good A.

Step-by-step explanation:

Jessica spends all her income on two goods, A and B.

The price of A is $5, and the price of B is $7.

At the current consumption bundle, the marginal utility of A is 10, and the marginal utility of B is 21.

The total utility is maximized when the ratio of marginal utility and price of the goods consumed is equal for all the goods in the bundle.

The ratio for Good A

=
`(10)/(5)`

= 2

The ratio for good B

=
`(21)/(7)`

= 3

Since the ratio is higher for good B, the consumer should shift from consumption of good B to good A until the ratio is equal for both the goods.