Question

Mrs. Arnold is spending all her money income by buying bottles ofsoda and bags of pretzels in such amounts that the marginal utilityof the last bottle is 60 utils and the marginal utility ofthe last bag is 30 utils. The prices of soda and pretzels are $.60per bottle and $.40 per bag respectively. It can be concludedthat:

A.the two commoditites are substitute goods.
B.Mrs Green should spend more on pretzels and less on soda.
C.Mrs. Green should spend more on soda and less on pretzels.
D.Mrs.Green is buying soda and pretzels in theutility-maximizing amounts.

Answer 1

Answer:

The answer is C. Mrs. Green should spend more on soda and less on pretzels.

Explanation:

Marginal utility-price ratio = marginal utility of a generic good  / price of a generic good

Soda Marginal utility-price ratio= 60/ 0.60 = 100 utils per dollar

Pretzels Marginal utility-price ratio = 30/ 0.40 = 75 utils per dollar

Mrs. Arnold should choose  soda as it has a higher marginal utility-price ratio than that of  pretzels.