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:

should buy less B and more A

Answer 1

∵ MU A / P A > MU B / P B

∴ A purchased & consumer more , B purchased & consumed less.

Step-by-step explanation:

Consumer is at utility maximising equilibrium, where Marginal Utility per unit of price spent is equal for both goods consumed by consumer.

MU A / P A = MU B / P B

MU A / P A = 16 / 2 = 8

MU B / P B = 24 / 4 = 6

In above case : MU A / P A > MU B / P B [ ∵ 8 > 6 ]

This implies consumer is getting more utility (satisfaction) per unit of price spent on Good A , than that of Good B.

So, consumer Thompson will consumer more of Good A & less of Good B.