A consumer currently spends a given budget on two goods, X and Y, in such quantities that the marginal utility of X is 10 and the marginal utility of Y is 8. The unit price of X is $5 and the unit price of Y is $2. The utility-maximizing rule suggests that this consumer should
A)increase consumption of product X and decrease consumption of product Y.
B)increase consumption of product X and increase consumption of product Y.
C)increase consumption of product Y and decrease consumption of product X.
D)stick with the current consumption mix because it yields maximum utility.

Question

Quizplus · Accepted Answer

The utility-maximizing rule states that for a consumer to achieve maximum utility, the ratio of the marginal utility to the price of each good should be equal across all goods. In this case, MUx/Px = 10/5 = 2 and MUy/Py = 8/2 = 4. Since the ratio for Y is higher, the consumer should increase consumption of Y and decrease consumption of X to equalize these ratios.

A Consumer Currently Spends a Given Budget on Two Goods