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Marginal Cost and Benefit Analysis
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A consumer has $100 to spend on two goods, A and B. The marginal benefit of the last unit of good A is $20, while the marginal benefit of the last unit of good B is $30. To maximize utility, how should the consumer allocate their spending?

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Choose the Best Answer

A

Spend all $100 on good A

B

Spend all $100 on good B

C

Spend $50 on good A and $50 on good B

D

Spend $70 on good B and $30 on good A

Understanding the Answer

Let's break down why this is correct

Answer

To maximize utility, a consumer should compare the marginal benefit of each good to its cost. In this case, the marginal benefit of the last unit of good A is $20, and for good B, it is $30. Since the marginal benefit of good B is higher, the consumer should spend more on good B to get more satisfaction. For example, if they buy one unit of good B for $30, they would still have $70 left to spend on good A. By focusing on the good that provides the highest marginal benefit relative to its cost, the consumer can make the best use of their $100.

Detailed Explanation

To get the most satisfaction, spend more on the good that gives more benefit. Other options are incorrect because Spending all on good A ignores the higher benefit from good B; Spending all on good B misses out on balancing benefits.

Key Concepts

Marginal benefit
Utility maximization
Topic

Marginal Cost and Benefit Analysis

Difficulty

medium level question

Cognitive Level

understand

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