Question

Balancing utility and price Suppose Alex has to choose between purchasing plane tickets and milk. Which of the following is the utility-maximizing rule that Alex should follow while choosing the optimal quantities of these two goods? (Note: In the answer options that follow, MU stands for "marginal utility.")

Answer 1

Answer:

MUm/Pm = MUp/Pp     [MU = marginal utility; p = plane ; m = milk ; P= Price]

Explanation:

Consumer Equilibrium refers to consumer's utility maximising consumption , given prices & income.

Two Goods Case (Goods 1 &2): Equilibrium is where MU1 / P1= MU2 / P2

Here, two goods milk & plane : Equilibrium where  MUm/Pm = MUp/Pp

If MUm/Pm > MUp/Pp : It means utility (satisfaction) of per unit money spent on milk is more than that of plane tickets. So, the consumer will tend to consumer more milk - this will reduce MU from milk [DMU law] , this will happen till falling  MUm/Pm becomes = MUp/Pp

If MUp/Pp > MUm/Pm : It means utility (satisfaction) of per unit money spent on plane tickets is more than that of plane tickets. So, the consumer will tend to consumer more plane tickets - this will reduce MU from plane tickets  [DMU law], this will happen till falling   becomes  MUp/Pp = MUm / Pm.