Question

Allocating Income to Maximize utility is essential in microeconomic theory, based on the following figures, where P of A = 3 OMR and P of B = 6 OMR

Q	TU of A	TU of B	MU of A	MU of B	MUA/P	MUB/P
1	12	21
2	22	33
3	28	42
4	32	48
5	34	51
6	34	51

The Required:

1. Fill the table above
2. Explain when the Utility maximization holds

Answer 1

Ans) Marginal utility (MU) = change in total utility ÷ change in quantity consumed

When consumer eats 2 units of A, its marginal utility is (22-12)/(2-1) = 10

Marginal utility per dollar = Marginal utility ÷ price of product

Utility maximisation rule ÷ MUx/Px = MUy/Py

We see that when consumer consumes 3 units of good A and 2 units of good B, its marginal utility per dollar is same. Therefore, it is utility maximising quantity (3 units of good A and 2 units of good B).