Assume that product Alpha and product Beta are both priced at $1 per unit and that Ellie has $20 to spend on Alpha and Beta. She buys 8 units of Alpha and 12 units of Beta. The marginal utility of Alpha is 40 and the marginal utility of Beta is 20. This indicates that
A)Ellie should make no change in consumption.
B)given another dollar, Ellie should buy an additional unit of Beta.
C)in order to maximize utility, Ellie should buy more of Beta and less of Alpha.
D)in order to maximize utility, Ellie should buy more of Alpha and less of Beta.

Question

Quizplus · Accepted Answer

To maximize utility, consumers should allocate their spending so that the marginal utility per dollar spent is equal across all goods. Here, the marginal utility per dollar spent on Alpha is 40 ($1 per unit), and for Beta, it is 20 ($1 per unit). Since the marginal utility per dollar spent on Alpha is higher, Ellie should buy more of Alpha and less of Beta to maximize her utility.

Assume That Product Alpha and Product Beta Are Both Priced