The relative price of beer to bacon is 2:1.If Bob's current consumption is at a level where MUbₑₑᵣ/MUbₐcₒn is 1:2, then to maximize total utility Bob must
A)consume more beer and less bacon.
B)not change his current consumption of beer and bacon.
C)consume less beer and more bacon.
D)raise the price of beer.
E)consume twice as much beer and half as much bacon.

Question

Quizplus · Accepted Answer

The relative price of beer to bacon is 2:1. This means that for every 2 units of beer, Bob can buy 1 unit of bacon.

Bob's current consumption level is such that MUbₑₑᵣ/MUbₐcₒn is 1:2. This means that Bob is getting more satisfaction from bacon than from beer. For every additional unit of bacon, Bob is getting twice as much extra satisfaction compared to the satisfaction gained from an additional unit of beer.

To maximize total utility, Bob should consume less beer and more bacon. By doing so, he will be able to increase his overall satisfaction by a greater amount than if he were to consume more beer and less bacon or maintain his current consumption level. Hence, the correct choice is C.

The Relative Price of Beer to Bacon Is 2:1