Question

In May and June, Tammy spent all her clothing budget on bathing suits and beach bags. Each bathing suit cost $75. At Tammy’s optimal choice, her marginal utility from the last bathing suit purchased is 300 and her marginal utility from the last beach bag purchased is 200. This means that each handbag must cost:

$25

$100

$50

Answer 1

Each handbag must cost: $50

Step-by-step explanation:

Goods :

Bathing suits – Price = $75

Beach bags – Price = ?

At the optimal choice (means equilibrium condition) ,

Marginal utility of last bathing suit purchased = 300

Marginal utility of last beach bag purchased = 200

Our equilibrium condition is marginal utility of money expenditure of both the goods must be equal.

MU of Bathing suits ÷ Price of Bathing suits = MU of Beach bags ÷ Price of Beach bags

300 ÷ $75 = 200 ÷ Price of Beach bags

4 = 200 ÷ Price of Beach bags

Price of Beach bags = 200 ÷4

= $50

Each handbag must cost: $50