Question

Sally purchases only pasta and salads with her budget of $160 per month. Each month she buys ten pasta dinners at $6 each and twenty salads at $5 each. The marginal utility of the last unit of each is 30. What should Sally do? Explain.

7.0.3

Answer 1

(MU/P) of pasta = 30/6 = 5

(MU/P) of salad = 30/5 = 6

at equilibrium the marginal utility to that of price of both the goods should be equal and because the ratio is more for salad and less for pasta, assuming the prices constant and applying the law of diminishing marginal utility, you can understand that if we consume more salad the marginal utility decreases and if you consider less pasta the marginal utility increases so that ultimately the marginal utility to price of both the goods will be equal and that is the reason why Sally should consume more salad and less pasta