Question

Mr. Schultz is exhausting his money income by buying beer and bags of pretzels in such amounts that the marginal utility of the last bottle is 60 utils and the marginal utility of the last bag is 40 utils. The prices of beer and pretzels are 60 cents per bottle and 40 cents per bag. What adjustments should Mr. Shultz make to increase his total utility? Please Explain.

Answer 1

Mr. Schultz should adjust his spending on beer and pretzels to equalize the marginal utility per dollar for both items to maximize his total utility. He's currently getting equal marginal utility per dollar from both; if he can increase this for any item within his budget, he should reallocate his spending.

Step-by-step explanation:

The scenario with Mr. Schultz demonstrates the concept of marginal utility per dollar. To increase his total utility, Mr. Schultz should adjust his spending to equalize the marginal utility per dollar for both the beer and pretzels. Currently, he's getting 60 utils from the last bottle of beer, which costs 60 cents, and 40 utils from the last bag of pretzels, which costs 40 cents. This gives him a marginal utility per dollar of 1 (60 utils/60 cents) for the beer, and 1 (40 utils/40 cents) for the pretzels.

To maximize utility, he should ensure that the utility he gains from the last cent spent on each item is the same. If he can increase the marginal utility per dollar of any item without exceeding his budget, he should do so. For example, if Mr. Schultz finds that he could get more than 60 utils from another bag of pretzels, or more than 40 utils from another bottle of beer for the same money, he should reallocate his spending accordingly.