Question

Alex has allocated his income in such a way that the marginal utility of the last unit of product X he consumes is 40 utils and that of the last unit of Y is 16 utils. If the unit price of X is $5, then the price of Y must be

Answer 1

Price of y(Py)=$2 per unit

Step-by-step explanation:

Marginal utility can be defined as the additional utility of a consumer as a result of the additional unit of goods consumed.

Let

Marginal utility of x= MUx

Marginal utility of y=MUy

Price of x=Px

Price of y=Py

Given

MUx=40 utils

MUy=16 utils

Px=$5

Py=?

Then,

MUx/Px=MUy/Py

40utils/$5=16 utils/Py

8 utils/$ =16utils/Py

Make Py subject of the formula by cross multiplying

Py×8= 16

Py=16/8

Py=$2 per Unit

Price of y=$2 per unit