Question

The price of paint is $2.00 per tube and the cost of canvas is $3.00 per sheet. Mr. Ross gets 10 utils from his last tube of paint and $12 utils from his last sheet of canvas. He currently is spending his entire art budget. To maximize utility what should Mr. Ross do?

	Buy less paint and more canvas
	Buy more paint and less canvas
	Nothing, he is already maximizing utility
	Buy more paint and more canvas

Answer 1

Marginal utility from last tube of paint (MU_P) = 10

Marginal utility from last sheet of canvas (MU_C) = 12

Price of paint (P_P) = $2

Price of canvas (P_C) = $3

Mr. Ross would maximize his utility when following condition would be fullfilled -

MU_P/P_P = MU_C/P_C

MU_P/P_P = 10/2 = 5

MU_C/P_C = 12/3 = 4

It can be seen that,

MU_P/P_P > MU_C/P_C

This means Mr. Ross should buy more paint and less canvas. This will lead to decrease in marginal utility from paint and increase in marginal utility from canvas.

This will remain continue till MU_P/P_P = MU_C/P_C is not achieved.

Hence, the correct answer is the option (2) [Buy more paint and less canvas].