Question

Above is a utility schedule for your grandmother. Assume the equilibrium price of Product A is $5 and the equilibrium price of Product B is $2, and your grandmother can only consume these two goods. How many units of Product B do you suggest your grandmother purchase if you want her to maximize her utility and she only has $14 to spend on both goods?

Answer 1

Grandmother should purchase 2 units of both products

Step-by-step explanation:

Let's denote

MU = Marginal utility

P = Price

Q = Quantity

The Utility will be maximum when both unit's MU/P is equal

Product A

Q MU P MU/P

1 80 $5 16

2 40 $5 8

3 30 $5 6

4 15 $5 3

5 7 $5 1.4

6 6 $5 1.2

7 5 $5 1

8 3 $5 0.6

Product B

Q MU P MU/P

1 30 $2 15

2 16 $2 8

3 15 $2 7.5

4 14 $2 7

5 13 $2 6.5

6 12 $2 6

7 11 $2 5.5

8 10 $2 5

As you can see above MU/P is same when grandma purchase 2 product each to maximize utility.