📚 Learning Guide
Marginal Utility and Budgeting
easy

In the context of utility maximization, if a consumer is allocating their budget between two goods, how should they adjust their consumption if the marginal utility per dollar spent on one good is greater than that of another?

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Choose the Best Answer

A

Increase consumption of the good with lower marginal utility per dollar spent.

B

Decrease consumption of the good with higher marginal utility per dollar spent.

C

Increase consumption of the good with higher marginal utility per dollar spent.

D

Maintain the same consumption level of both goods.

Understanding the Answer

Let's break down why this is correct

Answer

When a consumer is deciding how to spend their money on two goods, they want to get the most satisfaction or utility from their purchases. Marginal utility refers to the extra satisfaction gained from consuming one more unit of a good. If the marginal utility per dollar spent on one good is higher than that of another, the consumer should buy more of the first good and less of the second. This adjustment will help them maximize their overall satisfaction because they are getting more value for each dollar spent. For example, if buying an extra slice of pizza gives more satisfaction per dollar than a candy bar, the consumer should choose to buy more pizza until the satisfaction from both goods is equal per dollar spent.

Detailed Explanation

When one good gives you more satisfaction per dollar, you should buy more of it. Other options are incorrect because This choice suggests you should buy less of the better option; This option says to reduce the good that gives you more satisfaction.

Key Concepts

Utility maximization
Topic

Marginal Utility and Budgeting

Difficulty

easy level question

Cognitive Level

understand

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