The table shows the marginal-utility schedules for goods A and B for a hypothetical consumer. The price of good A is $1, and the price of good B is $2. The income of the consumer is $8. If the price of B falls to $1, while the price of A and the consumer's income stay the same, what would be the utility-maximizing combination of goods A and B?
A) 5 A and 3 B
B) 4 A and 4 B
C) 3 A and 5 B
D) 2 A and 6 B

Question

The table shows the marginal-utility schedules for goods A and B for a hypothetical consumer. The price of good A is $1, and the price of good B is $2. The income of the consumer is $8.  If the price of B falls to $1, while the price of A and the consumer's income stay the same, what would be the utility-maximizing combination of goods A and B?
A) 5 A and 3 B 
B) 4 A and 4 B 
C) 3 A and 5 B 
D) 2 A and 6 B

Quizplus · Accepted Answer

Before the price change, the consumer is maximizing utility by consuming 4 units of good A and 2 units of good B. At this combination, the marginal utility per dollar spent on each good is equal to the other (MUa/Pa = MUb/Pb).

After the price change (B falls to $1), the consumer has the same income of $8, and now the price of good B is equal to the price of good A. Thus, in order to maximize utility, the consumer should allocate income in such a way that marginal utility per dollar spent on both goods is equal.
Looking at the table, at 3 units of good A and 5 units of good B, MUa/Pa = 10/1 = MUb/Pb = 5/1 = 5. So, 3 A and 5 B is the utility-maximizing combination of goods A and B after the price change.

The Table Shows the Marginal-Utility Schedules for Goods a and B