7. MRS and utility maximization Hilary lives in Dallas and loves to eat desserts

Question

7. MRS and utility maximization Hilary lives in Dallas and loves to eat desserts. She spends her entire weekly allowance on yogurt and pie. A bowl of yogurt is priced at $1.25, and a piece of pumpkin pie is priced at $3.75. At her current consumption point, Hilary's marginal rate of substitution (MRS) of yogurt for pie is 2. This means that Hilary is willing to trade two bowls of yogurt per week for one piece of pie per week Does Hilary's current bundle maximize her utility-in other words, make her as well off as possible? If not, how should she change it to maximize her utility? Hilary could increase her utility by buying less yogurt and more pie per week OHilary could increase her utility by buying more yogurt and less pie per week. Hilary's current bundle maximizes her utility, and she should keep it unchanged

Explanation / Answer

MRS = 2

Price of yogurt / Price of pie = 1.25/3.75 = 0.33

Since MRS > Price Ratio

Hilary does not maximise her utility.

Hilary will consume only Yogurt to maximise her utility.

So, Hilary could increase her utiity by buying more yogurt and less pie per week.

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