Question

be found in a connect 2. Mrs. Simpson buys loaves of bread and quarts of milk each week at prices of $1 and 80 cents, respectively. At present she is buying these products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70 utils, respectively. Is she buying the utility-maximizing combination of bread and milk? If not, how should she reallo- cate her expenditures between the two goods? LO7.2 T n he inenorated into the theory of consumer oun hy or 5. In the last decade or so, there has been a dramatic expansion of small retail convenience stores (such as 7-Eleven, Kwik Shop, and Circle K), although their prices are generally much higher than prices in large supermarkets. What explains the success of the convenience stores? LO7.2 se any o you

Answer 1

Question 2

If a consumer is consuming two goods then, in that case, the consumer is said to be maximizing utility when he or she is consuming that quantity of two goods corresponding to which marginal utility per dollar spent on each good is equal.

Marginal utility per dollar spent is calculated by dividing marginal utility by the price of the good.

The marginal utility from the last unit of bread purchased is 80 utils.

The price of bread is $1.

So,

Marginal utility per dollar spent on bread = 80/1 = 80

The marginal utility from the last unit of milk purchased is 70 utils.

The price of milk is $0.80.

So,

Marginal utility per dollar spent on milk = 70/0.80 = 87.5

It can be seen that the marginal utility per dollar spent on both goods is not same.

So,

She is not buying the utility-maximizing combination of bread and milk.

The marginal utility per dollar spent on milk is greater than the marginal utility per dollar spent on bread.

So,

She should increase the consumption of milk and decrease the consumption of bread.

In other words, she should increase her expenditure on milk and decrease her expenditure on bread.