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7 December, 19:00

Above is a utility schedule for your grandmother. Assume the equilibrium price of Product A is $5 and the equilibrium price of Product B is $2, and your grandmother can only consume these two goods. How many units of Product B do you suggest your grandmother purchase if you want her to maximize her utility and she only has $14 to spend on both goods?

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  1. 7 December, 21:50
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    Grandmother should purchase 2 units of both products

    Explanation:

    Let's denote

    MU = Marginal utility

    P = Price

    Q = Quantity

    The Utility will be maximum when both unit's MU/P is equal

    Product A

    Q MU P MU/P

    1 80 $5 16

    2 40 $5 8

    3 30 $5 6

    4 15 $5 3

    5 7 $5 1.4

    6 6 $5 1.2

    7 5 $5 1

    8 3 $5 0.6

    Product B

    Q MU P MU/P

    1 30 $2 15

    2 16 $2 8

    3 15 $2 7.5

    4 14 $2 7

    5 13 $2 6.5

    6 12 $2 6

    7 11 $2 5.5

    8 10 $2 5

    As you can see above MU/P is same when grandma purchase 2 product each to maximize utility.
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