Question

Swathi consumes two services: going to the movies and going bowling. She has arranged her consumption...

Swathi consumes two services: going to the movies and going bowling. She has arranged her consumption so that the marginal utility of going to a movie is 20 and the marginal utility of going bowling is 10. The price of a movie is $10 and the price of bowling is $5.

A. Is Swathi maximizing her utility? How do you know?

B. How would Swathi change her consumption if the price of bowing increased to $10?

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Answer #1

A. The marginal utility of going to the movie is $20 and that of going to bowling is $10. Their respective costs are $10 and $5. A consumer is said to be maximizing his/her utility if the marginal utility per dollar spent is same. Here we can see that the marginal utility per dollar spent is equal to 2 in both the cases. Hence we can confirm that Swathi is maximizing her utility.

B. If the price of bowling changes to $10 we can see that the marginal utility per dollar spent for bowling drops to 1 whereas it remains 2 for watching the movie. In order to maximize her utility, Swathi would go to watch movie more till the point where the marginal utility per dollar spent on movie drops to the same as that of bowling i.e. 1.

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