Question

Consider the last purchase of two goods by a consumer. A bag of chips costs $1.75 and the marginal utility is 20. A cup of chili costs $2.50. What must the marginal utility of chili be for the consumer to maximize total utility

Answer 1

The marginal utility of chili must be 28.57 for the consumer to maximize total utility.

Step-by-step explanation:

The marginal utility of chili at which the consumer maximizes total utility can be calculated as follows:

Let:

CCHIP = Cost of a bag of chips = $1.75

MUCHIP = Marginal utility of a bag of chips = 20

CCHILI = Cost of a cup of chili = $2.50

MUCHILI = Marginal utility of a cup of Chili = ?

The condition for the utility maximization of the consumer is as follows:

MUCHIP / CCHIP = MUCHILI / CCHILI ……………………………. (1)

Substituting all the relevant values into equation (1) and solve for MUCHILI, we have:

20 / 1.75 = MUCHILI / 2.50

(20 / 1.75) * 2.50 = MUCHILI

MUCHILI = 28.57

Therefore, the marginal utility of chili must be 28.57 for the consumer to maximize total utility.