Homework Answers
Marginal utility per dollar is the marginal utility derived from consuming the last unit divided by the price of the good.
Let's assume that there are two goods, x and y.
Total utility is maximised when all income is spend and
MUx/Price of x= MUy/Price of y.
Assumptions=
1) Income is fixed, as more income means more Consumption and more total utility.
2) Consumer preferences are well defined.
3) Consuner is rational.
4) Goods have prices. There are no free goods.
If MUx/Price of x >MUy/Price of y then we will consume more of good x. Because of law of diminishing marginal utility, as we consume more of a good the utility decreases. So, MUx will fall till MUx/Price of x= MUy/Price of y.
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