Question

Quantity of Product A	Total Utility	Marginal Utility	Quantity of Product B	Total Utility	Marginal Utility
1	80	80	1	30	30
2	120	40	2	46	16
3	150	30	3	61	15
4	165	15	4	75	14
5	172	7	5	88	13
6	178	6	6	100	12
7	182	5	7	111	11
8	185	3	8	121	10

The table above refers to Elizabeth's utility schedule of Product A and Product B. The equilibrium price of Product A and Product B is $1 and $5 respectively. If Elizabeth has only $11 to spend on both goods, how many units of Product A will she consume if her goal is to maximize her utility?

Answer 1

Quantity of Product A MU of A/ Price of A Quantity of Total Product B Utility 30 Marginal Utility 30 MU of B / Price of B 80 6 46 16 3.2 40 30 30 61 Total Marginal Utility Utility 80 80 120 40 150 165 172 1786 182 185 6 6 6 12 100 111 121 2.8 2.6 2.4 2.2 2 10

Optimal condition is attained where MU of A / Price of A = MU of B / Price of B and budget constraint is satisfied.

MU of A / Price of A = MU of B / Price of B = 6 at 6 units of A and 1 unit of B

Budget line: P_A.A + P_B.B = Income

1A + 5B = 11

A + 5B = 11

Total cost of consuming 6 units of A and 1 unit of B = 1 x 6 + 5 x 1 = 11 = Income

So, Elizabeth will consume 6 units of A and 1 unit of B to maximize her utility.