📚 Learning Guide
Maximizing Utility with Budgets
medium

A consumer has a budget of $100 and is choosing between two goods, A and B. If the marginal utility per dollar spent on good A is 10 and on good B is 5, which of the following classifications best describes the consumer's situation?

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Choose the Best Answer

A

The consumer should buy more of good A to maximize utility.

B

The consumer should buy an equal amount of goods A and B.

C

The consumer should buy more of good B to maximize utility.

D

The consumer should not buy any goods.

Understanding the Answer

Let's break down why this is correct

Answer

In this situation, the consumer has a budget of $100 and is trying to get the most satisfaction, or utility, from their money. The marginal utility per dollar spent on good A is 10, while for good B it is only 5. This means that for each dollar spent, good A gives more satisfaction compared to good B. To maximize utility, the consumer should spend more on good A because it provides more value for the money. Therefore, the best classification for the consumer's situation is that they should focus on purchasing more of good A to make the most of their budget.

Detailed Explanation

Good A gives more satisfaction for each dollar spent. Other options are incorrect because Thinking both goods give the same value can be misleading; Choosing to buy more of good B ignores its lower value.

Key Concepts

Maximizing Utility
Budget Constraints
Marginal Utility
Topic

Maximizing Utility with Budgets

Difficulty

medium level question

Cognitive Level

understand

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