Todd is a cattle rancher. In June and July he spent his clothing budget on jeans and cowboy hats. Each pair of jeans cost $50 and each hat cost $100. At Todd's optimal choice, his marginal utility from the last pair of jeans purchased is 200. This means that his marginal utility from the last cowboy hat purchased is:
A) 550
B) 500
C) 450
D) 400

Question

Quizplus · Accepted Answer

The principle of utility maximization states that the consumer's money should be spent so that the marginal utility per dollar of expenditure is the same for all goods. Since the marginal utility from the last pair of jeans is 200 and each pair costs $50, the marginal utility per dollar is 4 (200 MU / $50). For the hats, to have the same marginal utility per dollar, and given that each hat costs $100, the marginal utility from the last cowboy hat purchased must be 400 (4 MU per dollar * $100).

Todd Is a Cattle Rancher