A consumer had been consuming product X for some time. This period, she buys fewer X in order to try some units of a new product Y. She finds that her marginal utility of X is 20 (at a price of $10 per unit), while the marginal utility of Y is 36 (at a price of $12). The utility-maximizing rule suggests that this consumer should
A)increase consumption of product X because of its lower price.
B)increase consumption of product X because it is an old reliable product.
C)increase consumption of product Y because it has a higher MU/P.
D)increase consumption of product Y because it has a higher MU.

Question

Quizplus · Accepted Answer

The utility-maximizing rule states that consumers allocate their income so that the last dollar spent on each product yields the same marginal utility. The marginal utility per dollar (MU/P) for product X is 20/10 = 2, and for product Y is 36/12 = 3. Since product Y has a higher MU/P, the consumer should increase consumption of product Y to maximize utility.

A Consumer Had Been Consuming Product X for Some Time