Question

If a consumer buys two goods, the rational spending rule requires that the:


(A) ratio of the average utility to price be equal for the two goods.

(B) total expenditure on the two goods be equal.

(C) ratio of the marginal utility to price be equal for the two goods.

(D) ratio of the total utility to price be equal for the two goods.

Answer 1

Answer:

The correct answer is letter "B": total expenditure on the two goods be equal.

Explanation:

The rational spending rule states that a consumer will distribute their expenditure across the products in their basket in a way that the marginal utility per currency unit is equal across all goods. Though, a consumer should purchase certain amounts of each good that produce the same marginal utility per dollar of all the goods to achieve maximum total utility.