Question

Milk (gallons) MUmilk Cereal (boxes) MUcereal --- 16 135 15 120 Sam allocates his income between milk and cereal. Milk costs $2.50 per gallon, and cereal costs $5.00 per box. Sam has $50 each week to spend on both goods. The table shows Sam's marginal utility (MU) for varying levels of milk and cereal consumption. Given the information provided, how should Sam allocate his income between milk and cereal to arrive at the optimal consumption bundle? 13 105 90 10 75 12 60 14 45 16 30 Sam should purchase Sam should purchase gallons of milk gallons of milk 12 N18 14 | 20 3 10 and and boxes of cereal.

Answer 1

MILK	MU	MU/P	CEREAL	MU	MU/P
2	16	6.4	1	135	27
4	15	6	2	120	24
6	13	5.2	3	105	21
8	9	3.6	4	90	18
10	8	3.2	5	75	15
12	7	2.8	6	60	12
14	6	2.4	7	45	9
16	5	2	8	30	6
18	4	1.6	9	12	2.4
20	3	1.2	10	8	1.6

Budget = 50

The utility is maximized where MU/P for both goods are equal to one another

Sam should purchase 4 gallons of milk and 8 boxes of cereal