Question

Shaun spends all of his income on food and shelter. The price of food is $50...

Shaun spends all of his income on food and shelter. The price of food is $50 and the price of shelter is $100. If Shaun’s marginal utility of food is 4 and his marginal utility of shelter is 10, is he maximizing his utility? Explain why or why not. If he is not maximizing utility then how should he change his consumption bundle?

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Answer #1

Utility maximization rule is,

MUf/Pf=MUs/Ps

4/50=10/100

0.08≠0.1

So, she is not maximizing their utility.

Why?

A person can maximise its utility by comparing per dollar marginal utility of two goods. She consumes good where marginal utility per dollar is equals for both the good. Here marginal utility per dollar for shelter is higher than the marginal utility per dollar for food. So he is not maximizing utility.

If he is not maximizing utility then how should he change his consumption bundle?

He should consume more of shelter than food. Because marginal utility per dollar for shelter is higher. First we have to consume the good, for which marginal utility per dollar is higher. So he have to consume more of shelter and less of food and equal marginal utility per dollar for both good.

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