Question

Martha’s current marginal utility from consuming orange juice is 100 utils per ounce and her marginal utility from consuming coffee is 50 utils per ounce. If orange juice costs $0.25 per ounce and coffee costs $0.20 per ounce, is Martha maximizing her total utility from the two beverages?

Answer 1

No, Martha is not maximizing her total utility from the two beverages.

Step-by-step explanation:

To determine if Martha is maximizing her total utility, we need to compare the marginal utility per dollar spent on each beverage. Marginal utility per dollar spent is calculated by dividing the marginal utility by the price of the good.

For orange juice, the marginal utility per dollar spent is 100 utils / $0.25 = 400 utils per dollar.

For coffee, the marginal utility per dollar spent is 50 utils / $0.20 = 250 utils per dollar.

Since Martha's marginal utility per dollar spent on orange juice (400 utils per dollar) is higher than her marginal utility per dollar spent on coffee (250 utils per dollar), she should consume more orange juice and less coffee in order to maximize her total utility.

By allocating more of her budget towards orange juice, Martha can increase her total utility.

In this case, Martha is not maximizing her total utility because she is not allocating her budget in a way that maximizes the marginal utility per dollar spent. By consuming more orange juice, she could potentially increase her total utility.

It is important to note that total utility is maximized when the marginal utility per dollar spent is equal across all goods consumed.

In this scenario, Martha's consumption pattern does not reflect this equalization, indicating that there is room for improvement in terms of maximizing her total utility.