Mark consumes only cookies and books. At his current consumption bundle, his marginal utility frombooks is 10 and from cookies is 5. Each book costs $10, and each cookie costs $2. Is he maximizing his utility? Explain. If he is not, how can he increase his utility while keeping his total expenditure constant?

Mark consumes only cookies and books. At his current consumption bundle, his marginal utility frombooks is 10 and from cookies is 5. Each book costs $10, and each cookie costs $2. Is he maximizing his utility? Explain. If he is not, how can he increase his utility while keeping his total expenditure constant?

 

 

Answer:

Under the utility approach, a consumer will attain equilibrium (maximize the utility level) in case of two commodities when the consumer spends his money in such a way that the ratio of the marginal utility of a commodity to its price is equal to the ratio of the marginal utility of the other commodities to its price. Mathematically, the condition is expressed as follows :-

Marginal Utility of Good X / Price of Good X = Marginal Utility of Good Y / Price of Good Y. (Assuming there are two goods namely X and Y.)

Applying the above concept / ratio in the given question,

Marginal Utility of Book / Price of Book = 10 / 10 = 1

Marginal Utility of Cookies / Price of Cookies = 5 / 2 = 2.5

Since, the ratio of the marginal utility of a commodity (book) to its price is not equal to the ratio of the marginal utility of the other commodities (cookies) to its price, accordingly, it can be said that Mark is not maximizing his utility (satisfaction level).

Mark should increase the consumption of cookies (as the marginal utility is more for cookies) and decrease the consumption of books (as the marginal utility is less for books). By decreasing the consumption of books, Marginal Utility of Book will increase. By increasing the consumption of cookies, Marginal utility of cookies will fall. Accordingly, a balance will be maintained between the consumption of books and cookies.

To attain maximum satisfaction level i.e., to increase the utility level, Mark should spends his money in such a way that the ratio of the marginal utility of a book to its price is equal to the ratio of the marginal utility of the cookies to its price.

(Marginal Utility of Book / Price of Book = Marginal Utility of Cookies / Price of Cookies.)

Asked on February 13, 2018 in economics.
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