Question

Marty consumes only pizza and beer. He has $50 to spend, the price of pizza is $2 per slice and the price of beer is $3 per bottle. He is currently consuming 10 slices of pizza and 10 bottles of beer a week. His marginal utility for pizza is 15 and his marginal utility for beer is 20. Is Marty maximizing his utility? If yes, how do you know? If not, what should he do to increase his utility?

Answer 1

Utility maximising condition is when : MU_P/ MU_B = P_P/ P_B

It implies that MU_P/P_P = MU_B/ P_B

So, by putting the values , we get

MU_P/P_P = 15/2 = 7.5

And MU_B/P_B = 20/3 = 6.7

We can see that these two are not equal . This implies that Mary is not maximising his utility .

In order to maximise his utility , he has to spend resources to buy more pizza because MU_P/ P_P > MU_B/P_B.

By increasing the consumption of pizza , marginal utility will decrease and the equality condition will maintain.