Question

Lucia lives in Miami and loves to eat desserts. She spends her entire weekly allowance on yogurt and pie. A bowl of yogurt is priced at $1.50, and a piece of pecan pie is priced at $4.50. At her current consumption point, Lucia's marginal rate of substitution (MRS) of yogurt for pie is 3. This means that Lucia is willing to trade three bowls of yogurt per week for one piece of pie per week. Does Lucia's current bundle maximize her utility in other words, make her as well off as possible? If not, how should she change it to maximize her utility?

a. Lucia's current bundle maximizes her utility, and she should keep it unchanged.
b. Lucia could increase her utility by buying more yogurt and less pie per week.
c. Lucia could increase her utility by buying less yogurt and more pie per week.

Answer 1

a. Lucia's current bundle maximizes her utility, and she should keep it unchanged.

Step-by-step explanation:

The computation is shown below:

As we know that the utility would be maximized when the marginal rate of substitution is equivalent to the price ratio

I.e.

MRS = Price ratio

Here, Price ratio is

= $4.5 ÷ $1.5

= 3

So the 3 would also represent the marginal rate of substitution (MRS)

Therefore the correct option is a.

hence, the rest of the options would be incorrect