At his current level of consumption, Evan gets twice as much marginal utility from an additional bottle of water as that from an additional bottle of soda. If the price of soda is $1.00 per bottle, then Evan is maximizing utility if the price of a bottle of water is:
A)$1.00
B)$1.50
C)$2.00
D)$0.50

Question

Quizplus · Accepted Answer

The rational spending rule maintains that consumers should allocate their spending between two goods such that the marginal utility per dollar spent is the same for both goods (that is, MU/P must be the same for both goods). Here, since the marginal utility from an additional bottle of water is twice as high as that from an additional soda, Evan is maximizing his utility if the price of water is twice the price of soda.

At His Current Level of Consumption, Evan Gets Twice as Much