Question

Frank spends $75 on 10 magazines and 25 newspapers. The magazines cost $5 each and the newspapers cost $2.50 each. Suppose that his MU from the final magazine is 10 utils while his MU from the final newspaper is also 10 utils. According to the utility-maximizing rule, Frank should:

Reallocate spending from magazines to newspapers.
Reallocate spending from newspapers to magazines.
Be satisfied because he is already maximizing his total utility.
None of the above.

Answer 1

Answer:

Reallocate spending from magazines to newspapers.

Explanation:

We are only given the utility provided by the last newspaper and the last magazine, but in order to answer the question I will consider that the utility remains the same from the first to the last unit.

Frank obtains 10 utils from purchasing each magazine and each newspaper:

• magazine = $5 / 10 utils = $0.50 per util
• newspaper = $2.50 / 10 utils = $0.25 per util

Frank obtains twice the utils from each dollar spent on newspapers than on magazines, so he should spend more money on newspapers.

Answer 2

The correct option is Reallocate spending from magazines to newspapers.

• The calculation is as follows:

Since Frank obtains 10 utils from purchasing each magazine and each newspaper:

So,  

magazine = $5 ÷ 10 utils = $0.50 per util

newspaper = $2.50 ÷ 10 utils = $0.25 per util

As we can see that  Frank obtains twice the utils from each dollar spent on newspapers as compared to the magazines, so he should spend more money on newspapers.

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