📚 Learning Guide
Maximizing Utility with Budgets
easy

If a consumer spends their entire budget on two goods and finds that the marginal utility per dollar spent is higher for one good, what should they do to maximize their utility?

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Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
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Choose the Best Answer

A

Buy more of the good with higher marginal utility per dollar

B

Buy equal amounts of both goods

C

Spend all budget on the good with lower marginal utility

D

Stop purchasing altogether

Understanding the Answer

Let's break down why this is correct

Answer

When a consumer has a fixed budget and is buying two goods, they want to get the most happiness or satisfaction, known as utility, from their spending. If they notice that the marginal utility per dollar spent is higher for one good, it means they get more satisfaction from each dollar spent on that good compared to the other. To maximize their overall utility, they should shift some of their spending from the good that gives less satisfaction to the one that provides more. For example, if a consumer is buying apples and oranges and finds that they get more satisfaction from apples for the same amount of money, they should buy more apples and fewer oranges. By doing this, they can increase their total satisfaction from their budget.

Detailed Explanation

To get the most satisfaction, buy more of the good that gives you more value for each dollar. Other options are incorrect because Buying equal amounts may seem fair, but it doesn't maximize happiness; Spending on the less valuable good wastes money.

Key Concepts

Maximizing Utility
Budget Constraints
Marginal Utility
Topic

Maximizing Utility with Budgets

Difficulty

easy level question

Cognitive Level

understand

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