Question

Quantity of Cake Total Utility Marginal Utility Quantity of Salad Total Utility Marginal Utility 1 16 16 1 30 30 2 30 14 2 46 16 3 42 12 3 61 15 4 52 10 4 75 14 5 60 8 5 88 13 6 66 6 6 100 12 7 70 4 7 111 11 You are at a restaurant and you want to determine how much cake and salad you should eat to maximize your utility. If your utility schedule is like the one above, and the price of a piece of cake is $1 and the price of a salad is $3, how many pieces of cake should you eat if you have a budget of $25?

Answer 1

Utility is maximized when MUc/Pc=MUs/Ps

where MUc=marginal utility of cake

MUs=marginal utility of salad.

Pc= price of cake

Ps= price of salad.

utility Maximization= MUc/Pc =MUs/Ps

here at 7 cake and 6 salad utility is maximized.

7 cake * $1= $7

6 salad* $3=$18

total Budget is $25.