Question

A consumer is in equilibrium and is spending income in such a way that the marginal utility of product X is 20 units and that of Y is 35 units. If the unit price of X is $4, then the price of Y must be:

a) $5.75
b) $7.00
c) $9.00
d) $10.50

Answer 1

The price of product Y, calculated based on maintaining consumer equilibrium and the equal marginal principle, must be $7.00 to ensure that the marginal utility per dollar spent on both products is the same.

Step-by-step explanation:

The question is related to the concept of consumer equilibrium in the context of microeconomics. The consumer is in equilibrium when the ratio of the marginal utility of two goods to their respective prices is equal. This is known as the equal marginal principle. In this case, we are given the marginal utility of product X (20 units) and product Y (35 units), along with the price of X ($4). To find the price of Y that would keep the consumer in equilibrium, we need to equate the ratios of marginal utility to price for both products. If the ratio of marginal utility to price is equal for two goods, X and Y, then MUx/Px = MUy/Py, or 20/4 = 35/Py. Solving for Py gives us the price of Y, which can be calculated as follows: