Question

Faced with two goods to buy, diamonds and silver, a utility-maximizing individual will buy according to...

Faced with two goods to buy, diamonds and silver, a utility-maximizing individual will buy according to which of the following statements?

A.

Marginal utility of diamonds divided by price of diamonds equals marginal utility of silver divided by price of silver.
B.

Marginal utility of diamonds equals marginal utility of silver.
C.

The price of diamonds equals the price of silver.
D.

The price of diamonds divided by marginal utility of silver equals the price of silver divided by marginal utility of diamonds.
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Answer #1

Marginal utility of diamonds divided by price of diamonds equals marginal utility of silver divided by price of silver

To maximize the total utility, an individual will buy that combination of both goods where marginal utility per rupee derived from both goods is equal i.e. marginal utility of last rupee spent on each commodity is same. Therefore a utility-maximising individual will buy that combination where marginal utility divided of diamonds divided by price of diamonds equals marginal utility of silver divided by price of silver.

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