Question

Alfred derives utility from consuming iced tea and lemonade. For the bundle he currently​ consumes, the marginal utility he receives from iced tea is 16​ utils, and the marginal utility he receives from lemonade is 8 utils. Instead of consuming this​ bundle, Alfred should:______.

a. buy more iced tea and less lemonade.b. buy more lemonade and less iced tea.c. buy more iced tea and lemonade.d. buy less iced tea and lemonade.e. none of these.

Answer 1

Alfred should buy more lemonade and less iced tea because the marginal utility he receives from iced tea is twice as much as from lemonade, indicating he may not be allocating his budget to maximize total utility given equal prices.

Step-by-step explanation:

Alfred should make his decision by comparing the marginal utility he receives from iced tea and lemonade. If Alfred wishes to maximize his total utility, he should allocate his budget in such a way that the marginal utility per dollar spent on each good he consumes is the same. In this case, without information on prices, we might assume that the prices of iced tea and lemonade are equal and therefore, Alfred should consume more of the good with the higher marginal utility and less of the good with the lower marginal utility. Alfred receives a marginal utility of 16 utils from iced tea, which is twice as much as he receives from lemonade, which is 8 utils. Therefore, Alfred should:

Answer 2

A

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 good = marginal utility / price of the good

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

An example of marginal utility. Imagine a traveller arriving from the desert where he hadn't had a drink of water in days .he is offered his first glass of water. the first cup of water he drinks would give him the highest utility. As more and more cups of water is drank, marginal utility decreases. At the point where he is fully satisfied, he stops drinking water and marginal utility becomes zero.