Question

Suppose the Price of Product A =$2.00/unit, the Price of Product B=$1.00/unit, and the Price of Product C =$ 3.00/units. Also, suppose the consumer has a budget of $12.00.

What is the relative marginal utility of each good when the consumer is maximizing utility?

What is the total utility (combined total utility) when the consumer is maximizing utility from consuming the three products?

Answer 1

The relative marginal utility is highest for Product B ($4.00) followed by Product A ($1.50) and then Product C ($0.67).

Total utility when the consumer is maximizing utility from consuming the three products is 59.67.

Step-by-step explanation:

When a consumer is maximizing utility on a given budget, they should allocate their spending in such a way that the ratio of the marginal utility to the price is equal for all goods. In this case, the prices of Product A, Product B, and Product C are $2.00/unit, $1.00/unit, and $3.00/unit respectively. To find the relative marginal utility, we need to compare the ratios of marginal utility to price for each product.

Let's calculate the marginal utility for each good and divide it by the price:

1. For Product A, the ratio of marginal utility to price is 3/2 = 1.5.
2. For Product B, the ratio of marginal utility to price is 4/1 = 4.
3. For Product C, the ratio of marginal utility to price is 2/3 ≈ 0.67.
   

Based on these ratios, the relative marginal utility is highest for Product B ($4.00) followed by Product A ($1.50) and then Product C ($0.67).

To find the total utility when the consumer is maximizing utility from consuming the three products, we need to determine the quantities of each product they should consume. Since we are given a budget of $12.00, we can allocate that budget in a way that maximizes total utility. Let's assume the consumer spends their entire budget on the three products:

1. If the consumer spends all their budget on Product A, they can buy 6 units (12/2 = 6).
2. If the consumer spends all their budget on Product B, they can buy 12 units (12/1 = 12).
3. If the consumer spends all their budget on Product C, they can buy 4 units (12/3 = 4).

To calculate the total utility for each scenario, we multiply the quantity of each product by its corresponding marginal utility:

1. Total Utility for Product A = 1.5 * 6 = 9.
2. Total Utility for Product B = 4 * 12 = 48.
3. Total Utility for Product C = 0.67 * 4 = 2.67.

The combined total utility when the consumer is maximizing utility from consuming the three products is 9 + 48 + 2.67 = 59.67.