Question

Ginny lives in San Francisco and loves to eat desserts. She spends her entire weekly allowance on yogurt and pie. A bowl of yogurt is priced at $1.25, and a piece of pumpkin pie is priced at $3.75. At her current consumption point, Ginny's marginal rate of substitution (MRS) of yogurt for pie is 3. This means that Ginny is willing to trade three bowls of yogurt per week for one piece of pie per week.

Does Ginny's current bundle maximize her utility—in other words, make her as well off as possible? If not, how should she change it to maximize her utility?

Answer 1

Yes, Ginny's current bundle maximizes her utility, as MRSxy=Px/Py,so she has attained consumer 's equilibrium.

Explanation------

According to Indifference curve approach, a Consumer strikes his equilibrium when----

MRSxy=Px/Py

Means when slope of indifference curve is equal to the slope of budget line.

In the context of statement given, let's assume----

X= pumpkin pie,y= yoghurt

Px = price of pumpkin pie=$3.75

Py= price of yoghurt=$1.25

MRSxy= marginal rate of substitution= slope of indifference curve= 3

At equilibrium, as we know----

MRSxy=Px/Py

So----- 3= 3.75/1.25

Hence, it is proved that Ginny is currently at equilibrium point and hence she is currently maximising her utility.