Sue consumes only two goods, food and clothing. The marginal utility on food is 22, and...
Sue consumes only two goods, food and clothing. The marginal utility on food is 22, and the marginal utility on clothing is 9. The price of food is $2.00/unit, and the price of clothing is $1.00/unit. Is Sue maximizing her utility? If not, she is consuming too much of food or clothing?
Homework Answers
Answer
Utility maximizing condition:
In order to maximize utility a consumer should consume that quantity at which MUx/Px = MUy/Py, where MU represents Marginal Utility and P represents price.
Hence Here MUf/Pf = 22/2 = 11 and MUc/Pc = 9/1 = 9.
Hence MUf/Pf is not equal to MUc/Pc
Hence Currently Sue is not maximizing her utility.
MUf/Pf > MUc/Pc
According to Law of diminishing marginal utility Marginal utility derive from additional utility must decline.
i.e. As consumption increases Marginal Utility decreases..
As, MUf/Pf > MUc/Pc , Hence MUc should be more and hence she should decrease the consumption of Clothing. Hence Currently she is consuming too much of Clothing
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