Question

Kevin lives in New York City and loves to eat desserts. He spends his entire weekly allowance on yogurt and pie. A bowl of yogurt is priced at $1.25, and a piece of pumpkin pie is priced at $5.00. At his current consumption point, Kevin's marginal rate of substitution (MRS) of yogurt for pie is 5. This means that Kevin is willing to trade five bowls of yogurt per week for one piece of pie per week.

Does Kevin's current bundle maximize his utility—in other words, make him as well off as possible? If not, how should he change it to maximize his utility?
A. Kevin's current bundle maximizes his utility, and he should keep it unchanged.
B. Kevin could increase his utility by buying more yogurt and less pie per week.
C. Kevin could increase his utility by buying less yogurt and more pie per week.

Answer 1

Option (C).

Step-by-step explanation:

According to the scenario, computation of the given data are as follow:-

A bowl of yogurt price = $1.25

A piece of pumpkin pie price = $5

Market Exchange Rate of Yogurt And Pie = Price of Pumpkin Pie ÷ Price of Yogurt

=$5 ÷ $1.25=$4

Kevin’s marginal rate of substitution(MRS) of yogurt for pie is 5. This is less the the market exchange rate.

Marginal rate of substitution > Price of Pie ÷ Price of Yogurt

The person can maximize his utility by consuming more pie,

Marginal rate of substitution = Price of Pie ÷ Price of Yogurt

Kevin’s current bundle does not maximize his satisfaction.

If Kevin increases marginal utility of dollar by buying more pie per week than the yogurt. It Increase his utility.

Thus the c option is correct.