Question

If Sandra's marginal utility per dollar from cheese is 25 and the marginal utility per dollar from crackers is 30,

A. Sandra should purchase more crackers and less cheese to increase her total utility.

B. Sandra's marginal utility from crackers will fall if she buys more crackers.

C. Sandra's marginal utility from cheese will rise if she buys less cheese.

D. Only answers B and C are correct.

E. Answers A, B, and C are correct.

I know that the correct answer to this question is choice E., but can you please explain why?

Answer 1

Ans: E) Answers A, B and C are correct.

Explanation:

Diminishing marginal utility refers to the addition made to the total utility at a decreasing rate by consuming additional unit of a good or service. It means marginal utility gradually decreases with the additional or subsequent consumption of goods or services. Conversly , marginal utility increases with the consumption or use of less goods or services.

Marginal utility = Change in total utility / Change in quantity

Or

MU = TUn - TUn-1

Utility maximization condition is where ;

• Entire given money outlay must be spent on both the goods.
• MUx / Px = MUy /Py

Budget constraint;

Y = Px * Qx + Py * Qy

In the above scenario , Sandra should purchase more crackers and less cheese in order to maximize her total utility.