If a consumer is maximizing utility with a budget of $20, which combination of apples and oranges maximizes total utility given the marginal utilities and prices?

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Seekh · Accepted Answer

When a consumer wants to use a $20 budget to get the most pleasure, they compare the marginal benefit of each good to its price by looking at marginal utility per dollar. If an apple gives 10 extra units of satisfaction for $2, its MU per dollar is 10 ÷ 2 = 5; if an orange gives 8 units for $1, its MU per dollar is 8 ÷ 1 = 8. Because the orange gives more satisfaction for each dollar spent, the consumer buys oranges first until the MU per dollar of oranges drops below that of apples. After spending $10 on oranges, the remaining $10 would be used to buy apples, giving the highest total utility. This rule—buy the good with the highest marginal utility per dollar until the budget is exhausted—ensures the consumer maximizes total utility.

If a consumer is maximizing utility with a budget of $20, which combination of apples and oranges maximizes total utility given the marginal utilities and prices?

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