Question

Bob lives in San Diego 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 pecan pie is priced at $3.75. At his current consumption point, Bob's marginal rate of substitution (MRS) of yogurt for pie is 2. This means that Bob is willing to trade two bowls of yogurt per week for one piece of pie per week.

Does Bob'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?

Answer 1

Answer and Explanation:

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

Current Consumption Marginal Rate of Substitution

= Marginal Utility (MU) of Pecan Pie ÷ Marginal Utility (MU) of Yogurt

= 2

Utility Maximized When Marginal Rate of Substitution (MRS)

= Marginal Utility of Pecan Pie ÷ Marginal Utility of Yogurt

= $3.75 ÷ $1.25

= 3

According to the analysis, Utility-maximizing MRS (3) is more than the current MRS (2). So to increase the utility bob should have to consume less pecan pie and more quantity of yogurt.