Question

Mrs. Simpson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these products in amounts such that the mar- ginal utilities from the last units purchased of the two prod- ucts are 80 and 70 utils, respectively. Is she buying the utility-maximizing combination of bread and milk? If not, how should she reallocate her expenditures between the two goods?

Answer 1

She should buy more milk and less bread.

Step-by-step explanation:

Mrs. Wilson is not taking advantage of the most suitable combination of milk and bread, because Mrs. Simpson is actually spending more on less bread when she could be spending more on even more milk.

This is because the marginal utility per penny spent on bread is 0.80 and the marginal utility per penny spent on milk is 0.875.