Question

# Allocating Income to Maximize utility is essential in microeconomic theory, based on the following figures, where...

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

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).

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