📚 Learning Guide
Maximizing Utility with Budgets
hard

In a scenario where a consumer has a fixed budget, how should they allocate their spending between two goods to maximize utility?

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Learning Path
Learning Path

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Choose the Best Answer

A

Spend equally on both goods regardless of price.

B

Allocate spending based on the ratio of marginal utility per dollar spent for each good.

C

Focus all spending on the good with the highest total utility.

D

Purchase only the good with the highest price to ensure maximum satisfaction.

Understanding the Answer

Let's break down why this is correct

Answer

To maximize utility with a fixed budget, a consumer should think about how much satisfaction they get from each good they want to buy. Utility means the happiness or satisfaction from consuming something. The key idea is to compare the price of each good with the satisfaction it provides. For example, if a consumer has $10 to spend on apples and bananas, they should look at how many apples and bananas they can buy for that money and how much happiness each fruit brings them. By balancing their spending on both goods in a way that gives them the most satisfaction without going over budget, they can make the best use of their money.

Detailed Explanation

To get the most satisfaction, spend based on how much happiness each dollar brings. Other options are incorrect because Spending the same on both goods ignores their prices; Focusing only on the good with the highest total happiness can waste money.

Key Concepts

Maximizing Utility
Budget Constraints
Marginal Utility
Topic

Maximizing Utility with Budgets

Difficulty

hard level question

Cognitive Level

understand

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