Question

Suppose Dianne Lindsay spends all her income on two goods, A and B, in a manner in which MUA = 15 and MUB = 75, and PA = 3 and PB = 25. Then she should:

1) is already maximizing her total utility and should make no change
2) should increase her purchases of B and decrease her purchases of A
3) should decrease MUB/PB ratio and therefore buy more of A and less of B
4) should increase her purchases of A and decrease her purchases of B

Answer 1

The correct option is 4). Dianne should increase her purchases of good A and decrease her purchases of good B to maximize her total utility, as per the utility maximization rule.

Step-by-step explanation:

When analyzing Dianne Lindsay's consumption pattern for two goods, A and B, we must look at the marginal utility-to-price ratio for each. Given MUA/PA = 15/3 = 5 and MUB/PB = 75/25 = 3, we can see that the utility per dollar spent on good A is higher than that of good B. Therefore, according to the utility maximization rule, Dianne should increase her purchases of A and decrease her purchases of B until the ratios are equal or her budget is exhausted.