Question

Sam divides his consumption between apple juice and bagels. Apple juice costs $1.00 per glass and bagels cost $2.00 each. Spending all of his income on apple juice and bagels, Sam has currently chosen to consume amounts of each good such that the marginal utility of apple juice is 10 and the marginal utility of bagels is 25 . Accordingly:

A. Sam cannot increase his utility further, given her income.
B. Sam can increase his utility by consuming more apple juice and fewer bagels.
C. Sam can increase his utility by consuming less apple juice and more bagels.
D. Sam should not consume any apple juice or bagels

Answer 1

Sam can increase his utility by consuming fewer apple juices and more bagels because the marginal utility per dollar is higher for bagels, indicating that he has not yet maximized his utility based on his current consumption choices.

Step-by-step explanation:

When considering whether Sam can increase his utility from consuming apple juice and bagels, it's important to look at the marginal utility per dollar spent on each good. The marginal utility per dollar for apple juice is 10 (since it costs $1 per glass), and for bagels, it is 12.5 (since they cost $2 each). For Sam to maximize his utility, he should consume goods until the marginal utility per dollar spent is equalized across all goods. Since the marginal utility per dollar is higher for bagels (12.5) than for apple juice (10), Sam can increase his utility by consuming fewer apple juice and more bagels. Adjusting consumption in this way will continue until the marginal utility per dollar is the same for both goods, at which point Sam would have reached his utility-maximizing choice given his budget constraint.