Question

Suppose that a haircut will give Dawn 2,000 units of utility and cost her $40, whereas a set of acrylic nails costs $25 and yields 1,000 units of util. Most likely Dawn should:_____.

A. be indifferent between the two choices.
B. choose the haircut because she will receive 50 units of utility per dollar as compared with 45 units of utility per dollar for the nails.
C. choose the haircut because each unit of utility will cost her 2 cents as compared with 2.5 cents for the nails.
D. choose the nails because she will obtain 50 units of utility per dollar as compared with 40 units of utility per dollar for the haircut.

Answer 1

b

Step-by-step explanation:

Marginal utility is the additional utility derived from consuming one more unit of a good

the consumption decision is to consume more units of a good that gives the higher utility per good.

Marginal utility per unit of good = marginal utility / price of the good

haircut = 2000 / 40 = 50

Nails = 1000 /25 = 40

the utility per unit for haircut is greater for haircut than nails, so he would choose haircut

When marginal utility is positive, it means that increasing consumption by one unit increases total utility

When marginal utility is negative, it means that increasing consumption by one unit decreases total utility

When marginal utility is zero, total utility has reached its maximum and no more units of goods would be consumed