Final answer:
The utility maximizing rule requires that the ratio of the marginal utility to the price of one good is equal to that of another good (MU1/P1 = MU2/P2). If these ratios are not equal, the consumer can reallocate their spending to increase their overall utility. This represents the point of highest possible satisfaction within their budget.
Step-by-step explanation:
The Utility Maximizing Rule
The utility maximizing rule states that for a consumer to achieve the highest satisfaction from their limited resources, the ratio of the marginal utility of one good to its price should be equal to that of another good. Formally, this is expressed as MU1/P1 = MU2/P2, where MU1 and MU2 are the marginal utilities of good 1 and good 2 respectively, and P1 and P2 are their prices. If this condition is not met, then it indicates that the consumer can increase their total utility by reallocating their budget to equalize these ratios.
To understand why this rule leads to a utility-maximizing choice, consider a scenario where the ratios are not equal. Suppose that MU1/P1 is greater than MU2/P2. This implies that each dollar spent on good 1 yields more utility than each dollar spent on good 2. Therefore, the consumer can increase their overall utility by purchasing more of good 1 and less of good 2, until the ratios are equal. Once the ratios are equal, any further reallocation would not increase total utility, signifying that the consumer has reached a point of maximum utility given their budget constraint.