Question

Robin consumes two goods X and Y. Each additional unit of X

yields Robin the same happiness as each additional unit of Y. But
each unit of X costs $5 while each unit of Y costs $2. Robin wishes
to spe

Answer 1

Robin should spend his entire budget of $40 on 20 units of Y.

Step-by-step explanation:

In this scenario, Robin consumes two goods X and Y. Each additional unit of X yields Robin the same happiness as each additional unit of Y. However, each unit of X costs $5 while each unit of Y costs $2. Robin wishes to spend his entire budget of $40 on these two goods. To find the utility-maximizing choice, we need to compare the marginal utility per dollar for X and Y.

To do this, we calculate the bang for the buck, which is the amount of additional happiness obtained per dollar spent. For X, with a cost of $5 and utility of 1, the bang for the buck is 0.2 utils per dollar. For Y, with a cost of $2 and utility of 1, the bang for the buck is 0.5 utils per dollar.

Since the bang for the buck for Y is higher, Robin should spend all of his budget on Y. This means he should buy 20 units of Y, which would cost $40.