Question

Mrs. Simpson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70 utils, respectively.

a. Is she buying the utility-maximizing combination of bread and milk?
O No, the marginal utility per cent spent on bread is 0.80 and the marginal utility per cent spent on milk is 0.875.
O No, the marginal utility per cent spent on bread is 0.875 and the marginal utility per cent spent on milk is 0.80.
O She may or may not be buying the utility-maximizing combination since the amount that she is purchasing is not given.
O We cannot determine the utility-maximizing combination of bread and milk from the given information.

Answer 1

Mrs. Simpson is not buying the utility-maximizing combination of bread and milk because the marginal utility per cent spent on milk is higher than that of bread.

Step-by-step explanation:

In order to determine if Mrs. Simpson is buying the utility-maximizing combination of bread and milk, we need to compare the marginal utility per cent spent on each item. The marginal utility per cent spent on bread is 0.80 (80 utils / $1) and the marginal utility per cent spent on milk is 0.875 (70 utils / $0.80). Since the marginal utility per cent spent on milk is higher than that of bread, Mrs. Simpson is not buying the utility-maximizing combination of bread and milk.