A consumer currently spends a given budget on two goods, X and Y, in such quantities that the marginal utility of X is 12 and the marginal utility of Y is 8. The unit price of X is $3 and the unit price of Y is $4. The utility-maximizing rule suggests that this consumer should
A)decrease consumption of product X and increase consumption of product Y.
B)decrease consumption of product X and decrease consumption of product Y.
C)decrease consumption of product Y and increase consumption of product X.
D)stick with the current consumption mix because it yields maximum utility.

Question

Quizplus · Accepted Answer

To maximize utility, the consumer should equalize the marginal utility per dollar spent on each good. Currently, the marginal utility per dollar for X is 12/3 = 4, and for Y is 8/4 = 2. Since the marginal utility per dollar is higher for X, the consumer should decrease consumption of Y and increase consumption of X.

A Consumer Currently Spends a Given Budget on Two Goods