Question

Suppose that Ms. Thomson is currently exhausting her money income by purchasing 10 units of A and 8 units of B at prices of $2 and $4 respectively. The marginal utility of the last units of A and B are 16 and 24 respectively. These data suggest that Ms. Thomson: Group of answer choices considers A and B to be complementary goods. has preferences that are at odds with the principle of diminishing marginal utility. should buy less B and more A. should buy less A and more B.

Answer 1

Answer: should buy less B and more A.

Step-by-step explanation:

Price of good A, PA = $2

Price of good B, PB = $4

The marginal utility on the last unit of A, MUA is given as 16

The marginal utility on the last unit of B, MUB is given as 24

Then, the marginal utility on the last dollar spent on A will be:

= MUA/PA

= 16/2

= 8

The marginal utility on the last dollar spent on B will be:

= MUB/PB

= 24/4

= 6

Based in the above calculation, Thomson should buy less B and more A as the marginal utility on the last dollar that is spent on A is more than that of B.