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13 November, 15:19

Balancing utility and price Suppose Alex has to choose between purchasing plane tickets and milk. Which of the following is the utility-maximizing rule that Alex should follow while choosing the optimal quantities of these two goods? (Note: In the answer options that follow, MU stands for "marginal utility.")

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  1. 13 November, 17:38
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    MUm/Pm = MUp/Pp [MU = marginal utility; p = plane; m = milk; P = Price]

    Explanation:

    Consumer Equilibrium refers to consumer's utility maximising consumption, given prices & income.

    Two Goods Case (Goods 1 &2) : Equilibrium is where MU1 / P1 = MU2 / P2

    Here, two goods milk & plane : Equilibrium where MUm/Pm = MUp/Pp

    If MUm/Pm > MUp/Pp : It means utility (satisfaction) of per unit money spent on milk is more than that of plane tickets. So, the consumer will tend to consumer more milk - this will reduce MU from milk [DMU law], this will happen till falling MUm/Pm becomes = MUp/Pp

    If MUp/Pp > MUm/Pm : It means utility (satisfaction) of per unit money spent on plane tickets is more than that of plane tickets. So, the consumer will tend to consumer more plane tickets - this will reduce MU from plane tickets [DMU law], this will happen till falling becomes MUp/Pp = MUm / Pm.
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Home » Business » Balancing utility and price Suppose Alex has to choose between purchasing plane tickets and milk. Which of the following is the utility-maximizing rule that Alex should follow while choosing the optimal quantities of these two goods?
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