Question

# Quantity of Good X (units) Marginal Utility (Good X) Quantity of Good Y(units) Marginal Utility (Good...

 Quantity of Good X (units) Marginal Utility (Good X) Quantity of Good Y(units) Marginal Utility (Good Y) 1 32 1 24 2 28 2 20 3 24 3 16 4 20 4 12 5 16 5 10 6 14 6 10 7 12 7 9 8 10 8 8

Consider an individual who is deciding on how much of good X and good Y to buy in order maximize her utility. The individual has \$20 to spend on the two goods and the price of Good X is \$2 per unit and the price of Good Y is \$4 per unit. How many units of good X will this individual buy?

Answer : 8 units of Good X is to be consumed to maximise utility.

 Good X Marginal utility Total utility Good Y Marginal utility Total utility 1 32 32 1 24 24 2 28 60 2 20 44 3 24 84 3 16 60 4 20 104 4 12 72 5 16 120 5 10 82 6 14 134 6 10 92 7 12 146 7 9 101 8 10 156 8 8 109

Given that budget of individual is \$20 and price of Good X is \$2 per unit and Good Y is \$4 per unit.

 Consumption bundle (X,Y) Total Utility (8,1) 156+24=180 (6,2) 134+44=178 (4,3) 104+60=164 (2,4) 60+72=132 (0,5) 82

The above given table shows the combinations of Good X and Good Y that is affordable for the individual given her budget constraint. And it is clear that the total utility is maximum when 8 units of Good X and 1 unit of Good Y is consumed and is 180.

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