The relative price of beer to back bacon is 2:1.If Bob's current consumption is at a level where MU_beer/MU_{back bacon} is 1:2,then to maximize total utility Bob must A)consume more beer and less back bacon. B)not change his current consumption of beer and back bacon. C)consume less beer and more back bacon. D)raise the price of beer. E)consume twice as much beer and half as much back bacon.

Question

Quizplus · Accepted Answer

Since the relative price of beer to back bacon is 2:1, it means that the price of beer is twice that of back bacon. To maximize total utility, Bob should aim to equate the marginal utility per dollar of beer to the marginal utility per dollar of back bacon. From the given information, MU_beer/MU_{back bacon} is currently at 1:2, which means that Bob gains twice as much utility from the last dollar he spends on back bacon compared to the last dollar he spends on beer. To equate the marginal utility per dollar of beer to that of back bacon, Bob needs to consume less beer and more back bacon. This is because the price of beer is higher, and Bob can gain more utility by spending more dollars on the relatively cheaper good, which is back bacon in this case. Hence, the best choice is to consume less beer and more back bacon (choice C).

The Relative Price of Beer to Back Bacon Is 2:1