Sally devotes all of her income to the consumption of apples and Reese's Peanut Butter Cups.At her current level of consumption,the marginal utility of an apple is 6 and the marginal utility of a Reese's Peanut Butter Cup is 8.Assume that diminishing marginal utility applies to both apples and Reese's Peanut Butter Cups.Suppose the price of an apple is $0.20 and the price of a Reese's Peanut Butter Cup is $0.25.To maximize her total utility,assuming that the goods are divisible,she would:
A)consume more Reese's Peanut Butter Cups and fewer apples.
B)consume less of both goods.
C)consume more apples and fewer Reese's Peanut Butter Cups.
D)There is not enough information to justify a change in her current level of consumption.

Question

Quizplus · Accepted Answer

To maximize utility, Sally should equalize the marginal utility per dollar spent on each good. Currently, the marginal utility per dollar for apples is 6/0.20 = 30, and for Reese's is 8/0.25 = 32. Since Reese's has a higher marginal utility per dollar, she should consume more Reese's and fewer apples.

Sally Devotes All of Her Income to the Consumption of Apples