Question

Jack maximizes her utility when he buys 6 pumpkins and 4 caramel apples. If the price of pumpkins is $4 each, and the price of caramel apples is $2 each, which of the following must also be true when he is maximizing her utility? Assume the quantity of pumpkins is measured on the x axis, and the quantity of caramel apples is measured on the y axis.

Answer 1

Utility maximizing bundle : Pumpkins = 6 and caramel apples = 4 .

Pp = $4 and Pa = $2

We know that at utility maximizing bundle : MRS=MUp/MUa = Pp/Pa i.e MUp/Pp = MUa/Pa (marginal utility per dollar for pumpkins must be equal to marginal utility per dollar for caramel apples ) at the utility maximizing bundle of 6 pumpkins and 4 caramel apples. Indifference curve is tangent to the budget line at that bundle i.e slope of the budget line is the same as the slope of the IC at the given utility maximizing bundle.

answered by: anonymous