Question

Alex wants to maximize his utility. At his current level of consumption, Alex's marginal utility from an additional cup of coffee is 15 utils, and his marginal utility from an additional can of soda is 11 utils. If the price of a cup of coffee is $3 and the price of a can of soda is $2, Alex should:

Answer 1

Available Options Are:

A. decrease his spending on both coffee and soda.

B. reallocate his spending away from soda and towards coffee.

C. not change his consumption of either coffee or soda.

D. reallocate his spending away from coffee and towards soda.

Answer:

D. Reallocate his spending away from coffee and towards soda.

Step-by-step explanation:

The utility per dollar of Coffee = 15 utils / $3 = 5 utils per dollar

Similarly

The utility per dollar of Soda = 11 utils / $2 = 5.5 utils per dollar

As the utility per dollar spending is more in the case of soda, hence ALex must spend more on soda to draw maximum utility out of its spending. Option D is correct statement.