Ambrose's utility function is . If the price of nuts (good 1) is $1, the price of berries (good 2) is $7, and his income is $259, how many units of berries will Ambrose choose?
A) 8
B) 197
C) 9
D) 18
E) 12

Question

Ambrose's utility function is  . If the price of nuts (good 1) is $1, the price of berries (good 2) is $7, and his income is $259, how many units of berries will Ambrose choose?
A) 8 
B) 197 
C) 9 
D) 18 
E) 12

Quizplus · Accepted Answer

To maximize his utility, Ambrose will allocate his entire budget on nuts and berries so that the marginal utility per dollar spent on both goods is equal.
Let x be the number of units of nuts that Ambrose chooses, then his expenditure on nuts is x and expenditure on berries is (259 - x).
MU1/P1 = MU2/P2
11ea6c55_6e67_d593_9875_43b987c4fee7_TB6162_11/x = 11ea6c55_6e67_d593_9875_43b987c4fee7_TB6162_11/(259 - x)/7
Solving for x, we get x = 9
So Ambrose will choose 9 units of nuts and 18 units of berries.

Ambrose's Utility Function Is