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Nancy's ratio of marginal utility of coffee to lipstick is 3:1, while the price ratio of...

Nancy's ratio of marginal utility of coffee to lipstick is 3:1, while the price ratio of coffee to lipstick is 1.5:1. Which of the following statements is (are) TRUE? I. Coffee provides Nancy with 3 times the utility of lipstick. II. Nancy could increase utility by decreasing her consumption of coffee by 3 units and increasing her consumption of lipstick by 1.5 units. III. Nancy could increase utility by decreasing her consumption of lipstick by 3 units and increasing her consumption of coffee by 2 units. IV. Nancy could increase utility by decreasing her consumption of coffee by 1 unit and increasing her consumption of lipstick by 3 units. I and II IV only III only I and III

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Answer #1

Answer : As we know that the correct option is D because it includes two statements

Firstly statement tell us about that coffee provides nancy three times more utility from the lipstick. As it is shown in marginal utility ratio is 3 :1 .

Secondly , III statement shows that we have to forego three units of lipstick in favour of her increasing consumpation of 2 units of coffee. It can determined by the price ratio of coffee and lipstick as follows

Price ratio of coffee/ Price ratio of lipstick = 1.5/1

Price ratio of coffee/ price ratio of lipstick =15/ 10 = 3/2

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