Answer to Question #32633 in Economics of Enterprise for abdouli

Question

Assume that product Alpha and product Beta are both priced at $1 per unit and that Salem has $20 to spend on Alpha and Beta. He buys 8 units of Alpha and 12 units of Beta. The marginal utility of Alpha is 40 and the marginal utility of Beta is 20. This indicates that:

Answer 1

Assume that product Alpha and product Beta are both priced at $1 per unit and that Salem has $20 to spend on Alpha and Beta. He buys 8 units of Alpha and 12 units of Beta. The marginal utility of Alpha is 40 and the marginal utility of Beta is 20. This indicates that:


a- Salem should make no change in consumption.
b-given another dollar, Salem should buy an additional unit of Beta.
c- in order to maximize utility, Salem should buy more of Beta and less of Alpha.
d- in order to maximize utility, Salem should buy more of Alpha and less of Beta.
In order to maximize utility MUa/Pa = MUb/Pb. As this equality isn't right in our case, Salem shoud buy more of Alpha, as with the same price it gives higher marginal utility.
So, the right answer is d.