Question

Let MUS be the marginal utility of a sandwich, MUH be the marginal utility of a hot dog, PS be the price of a sandwich, and PH be the price of a hot dog. When the price of the goods is zero, Pat eats a sandwich. When Pat has to pay, she eats a hot dog. When Pat has to pay, which of the following is necessarily true?

(A) MUS = MUH = PS = PH
(B) (MUS / PS) > (MUH / PH)
(C) PS < PH
(D) PS > PH
(E) MUS = 0

Answer 1

D) PS > PH

Step-by-step explanation:

When Pat doesn't have to pay, she will choose to eat a sandwich, therefore the MUS > MUH.

But when she has to pay, then she will choose to eat a hot dog, therefore the utils per dollar that Pat gets from a hot dog are more than the utils per dollar that she gets from a sandwich: (MUS / PS) < (MUH / PH)

The only explanation to this is that the price of sandwich is higher than the price of a hot dog: PS > PH