Question

Suppose the marginal utilities from consuming good X and Y are MUX=20 and MUY=30, respectively. And prices of good X and good Y are PX=$3 and PY=$4. Which of the following statements is true?

A. The consumer is maximizing utility

B. The consumer could increase utility by consuming less Y and more X

C. The consumer could increase utility by consuming less X and more Y

D. The consumer is receiving less marginal utility per dollar from good X than from good Y

Answer 1

The utility maximizing condition

Mux/Px =MUy/Py

It means that in consumer equilibrium, when the marginal utility from the consumption of the last dollar’s value of each good is the equal.

Mux/Px =MUy/Py

20/3<30/4

6.66< 7.5

Therefore for maximizing total utility, consumer can decrease the consumption of good X and increase the consumption of good Y. Hence in this way MU of X will increase and MU of Y will decrease.

Hence statement C is true.

Hence option C is the correct answer.