Question

Jerry spends $ 10 a month on pet dispensers and superman action figures. His marginal- utility-to-price ratio for the pea dispensers is 40, while marginal-utility-to-price ratio for superman action figures is 47. Explain why jerry is not maximizing his utility. What can he do to increase his utility?

Answer 1

Jerry is not maximizing his utility because his marginal- utility-to-price ratio for the pet dispenser is not equal to marginal-utility-to-price ratio for superman action figures.

marginal- utility-to-price ratio for the pet dispensers < marginal-utility-to-price ratio for superman action figures

40< 47

Jerry maximizes his utility when both of these are equal.

marginal- utility-to-price ratio for the pet dispensers = MU of pet dispensers / Price of pet dispenser

marginal-utility-to-price ratio for superman action figures = MU of superman action figures / Price of superman action

As

MU of pet dispensers / Price of pet dispenser < MU of superman action figures / Price of superman action

It means that if Jerry increases the purchase of superman action figure and decrease the purchase of Pet dispenser it will reduce the MU of superman action figure and increase MU of pet dispenser due to law of diminishing marginal utility.

And he will continue do this till both of them become equal and his utility maximizes.