Question

Assume that Raymond has $ 37.00 to spend on pretzels and beer. The price of pretzels is $3.00 and the price of beer is $5.00. Marginal utilities for each good are given below.

Units               MU P              MU P / P P                 MU B             MU B / P B

1st                   18                    6 40                    8

2nd                  15                    5 30                    6

3rd                   12                    4 25                    5

4th                   9                     3 20                    4

5th                   6                     2 15                    3

6th                   3                     1                                  5 1

What Quantity of pretzels will Raymond purchase?

8

3

0

4

Answer 1

Ther right answer is option 4. 4 units

Explanation: To maximize total utility, Raymond will allocate his money among pretzels and beer in such a way that the marginal utility per dollar spent on the last unit of both the goods equal. Raymond would purchase 4 units of pretzels and 5 units of beer. The marginal utility per dollar spent on the 5th unit of beer is 3 and the marginal utility per dollar spent on the 4th unit of pretzels is also 3. Also, this purchase basket exhausts all money of Raymond as 5 * $5 + 4 * $3 = $25 + $12 = $37.