Sally devotes all of her income to the consumption of apples and Reese's Peanut Butter Cups.At her current level of consumption,the marginal utility of an apple is six and the marginal utility of a Reese's Peanut Butter Cup is eight.Assume that diminishing marginal utility applies to both apples and Reese's Peanut Butter Cups.Suppose the price of an apple is $0.10,while the price of a Reese's Peanut Butter Cup is $0.25.To maximize her total utility,assuming that the goods are divisible,she would:
A) consume more Reese's Peanut Butter Cups and fewer apples.
B) consume less of both goods.
C) consume more apples and fewer Reese's Peanut Butter Cups.
D) There is not enough information to justify a change in her current level of consumption.

Question

Quizplus · Accepted Answer

Sally should allocate her limited budget in such a way that the marginal utility per dollar spent on each good is equal. The marginal utility per dollar spent on apples is 60 (6/0.10) while the marginal utility per dollar spent on Reese's Peanut Butter Cups is 32 (8/0.25). This means Sally gets more satisfaction per dollar spent on apples than on Reese's Peanut Butter Cups. Therefore, she should consume more apples and fewer Reese's Peanut Butter Cups to maximize her total utility.

Sally Devotes All of Her Income to the Consumption of Apples