Assume James purchases only two goods,steak and chicken,with his weekly income of $60.The price of steak is $10 and the price of chicken is $5.The following table shows the marginal utility James gets from each additional pound of steak and chicken: Given the above information,if the price of steak falls to $8,what quantities of steak and chicken should James purchase to maximize his utility?
A)6 steak,2 chicken
B)5 steak,3 chicken
C)4 steak,4 chicken
D)5 steak,4 chicken
E)3 steak,6 chicken

Question

Assume James purchases only two goods,steak and chicken,with his weekly income of $60.The price of steak is $10 and the price of chicken is $5.The following table shows the marginal utility James gets from each additional pound of steak and chicken:  Given the above information,if the price of steak falls to $8,what quantities of steak and chicken should James purchase to maximize his utility?
A)6 steak,2 chicken 
B)5 steak,3 chicken 
C)4 steak,4 chicken 
D)5 steak,4 chicken 
E)3 steak,6 chicken

Quizplus · Accepted Answer

To maximize utility, James should allocate his entire budget so that the marginal utility per dollar is equal across both goods. One way to do this is to equate the ratio of the marginal utility of each good to its price.

Initially, MUe/Pe = 20/10 = 2 and MUc/Pc = 18/5 = 3.6. Since the marginal utility per dollar is higher for chicken initially, James should consume more chicken and less steak.

If the price of steak falls to $8, the new marginal utility per dollar for steak is MUe/Pe = 20/8 = 2.5. This is now higher than the marginal utility per dollar for chicken, which remains 3.6. Therefore, James should now consume more steak and less chicken.

One way to allocate the budget would be to purchase 5 pounds of steak and 4 pounds of chicken. This would cost ($5 x 4) + ($8 x 5) = $60, which is the entire budget. The total utility from this allocation is 20+20+20+20+20+18+18+18 = 134, which is higher than any other allocation. Therefore, the answer is (D) 5 steak, 4 chicken.

Assume James Purchases Only Two Goods,steak and Chicken,with His Weekly