Jane is attempting to maximize utility by selecting a market basket of goods. Fo

Question

Jane is attempting to maximize utility by selecting a market basket of goods. For each of the goods in the market basket the marginal utility per dollar spent is equal. There are some goods which are affordable but do not appear in the Jane's market basket.

If Jane has maximized utility, the marginal utility per dollar spent on each of the goods that does not appear in the market basket is:

A. infinite.

B. too high.

C. too low. (correct)

D. zero.

E.none of the above.

Please explain why C is correct.

Explanation / Answer

Correct Answer:

C

Explanation:
To maximize the utility, Jane has to follow the Equi marginal principle or law of Equi-marginal utility where marginal utility drawn by a product per unit of dollar spent should be equal. Hence, Jane will be propelled to include only those goods whose marginal utility per unit of dollar spent is either equal or higher than the existing products in the portfolio. Hence, Jane will not include goods whose marginal utility per unit of the dollar is very low.
A product cannot have infinite marginal utility per dollar, as dollar spent is already there in the denominator.

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