Question

d) If at the current level of consumption, a customer’s marginal utility from the last brand name drug consumed is 400 and the marginal utility from the last generic drug is 300. If you use the prices, 50$ for generic drug and $100 for brand name drug. a. Is this consumer maximizing his utility? Why or why not? b. how can the consumer get a higher utility?

Answer 1

a) The utility maximization rule is:

MU of brand name drug / Price of brand name drug = MU of generic drug / Price of generic drug

400 / 100 = 4

300 / 50 = 6

In the current consumption bundle, the MU of brand name drug / Price of brand name drug < MU of generic drug / Price of generic drug. So, this consumer is not maximizing his utility. It is because MU per dollar from brand name drug is less than the MU per dollar from generic drug.

b) To maximize utility, the customer should purchase more of generic drug and less of brand name drug. By doing so MU per dollar from brand name drug will increase and the MU per dollar from generic drug will decrease.

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