Question

2. Andy derives utility from two goods, potato chips (Qp) and Cola (Qc). He is currently spending all his income consuming 5 Cola and 4 bags of potato chips. The marginal utility of 5thCola is 45 and the marginal utility of the 4th potato chips is 50. If the price of potato chips is $0.75 and the price of Cola is $1.00. How would you suggest Andy to change his current consumption bundle?

1. Eat more potato chips and less Cola.

2. Drink more Cola and less potato chips.

3. Andy is already utility-maximized

4. None of the above

Answer 1

Answer: Eat more potato chips and less Cola.

Given:

Marginal utility of cola (MU_x) = 45

Price of cola (P_x) = $1.00

Marginal utility of potato chips (MUy) = 50

Price of potato chips (Py) = $0.75

Utility maximization condition:

(substitute the given values)

(45<66.67)

Andy has to consume more of potato chips and less of cola.

(When Andy consumes more and more of the same commodity, marginal utility falls)