Question

A consumer, faced with a fixed income and constant prices for all goods consumed, can only increase total utility if:

A the ratios of marginal utilities to prices are not equal for all goods consumed.

B all goods consumed have diminishing marginal utility.

C total utility is less than marginal utility.

D total utility is greater than marginal utility.

Answer 1

Option A.

• A consumer, faced with a fixed income and constant prices for all goods consumed, can only increase total utility if the ratios of marginal utilities to prices are not equal for all consumed goods.
• We know that the marginal utility refers to the change in total utility obtained by one more unit of a good and it is maximized when the consumer's utility is maximized from consuming a single good.
• But if the consumer is considering the consumption of two or more goods, the marginal utility per price ratio must not be equal for all goods consumed otherwise it will lead to a diminishing marginal utility.
• If his income is fixed and the prices are constant, he must consume only those goods whose ratios of marginal utilities to price are different.