Question

Assume that Clara purchases a combination of products Y and Z such that, after she is done spending her limited income, MUy/Py = 25 and MUz/Pz= 15. Based on the equal marginal principle, Clara:

A. Is maximizing her total utility
B. Should have purchased more Y and less Z
C. Should have purchased less Y and more Z
D. Should have purchased less Y and less Z

Answer 1

Clara is not maximizing her total utility (Option A) with the given marginal utility and price ratios for products Y and Z. To maximize utility, she should purchase more Y and less Z so that the marginal utility per dollar spent is equal across both goods.

Step-by-step explanation:

The question involves the concept of utility maximization in the context of consumer choice in economics. Given the ratios MUy/Py = 25 and MUz/Pz = 15, we can infer that the marginal utility per dollar spent on product Y is higher than that for product Z.

According to the equal marginal principle, a consumer maximizes total utility when the marginal utility per dollar spent is equal across all goods. Thus, since MUy/Py > MUz/Pz, it would suggest that Clara is not maximizing her total utility because she could get more satisfaction by purchasing more of good Y and less of good Z, given her limited income.

The correct option for this question is B. Clara should have purchased more Y and less Z to maximize her total utility under the given budget constraints. This aligns with the general rule that in a utility-maximizing choice, the marginal utility per dollar spent should be the same for both goods when the budget is exhausted.