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

Question

7. MRS and utility maximization Ginny lives in Dallas and loves to eat desserts. She spends her entire weekly allowance on pudding and pie. A bowl of pudding is priced at $1.75, and a piece of pumpkin pie is priced at $7.00. At her current consumption point, Ginny's marginal rate of substitution (MRS) of pudding for pie is 3. This means that Ginny is willing to trade three bowls of pudding per week for one piece of pie per week. Does Ginny'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 ( Ginny could increase her utility by buying less pudding and more pie per week. O Ginny's current bundle maximizes her utility, and she should keep it unchanged. Ginny could increase her utility by buying more pudding and less pie per week.

Explanation / Answer

option 3

MRS of pudding for pie = MU_pudding/MU_pie = 3

Price ratio = P_pudding/P_pie = 1.75/7 = 0.25

Note that market valuation of a pudding in terms of pie is lower than MRS of pudding for pie.

Thus, it is advisable that Ginny buys more of pudding and less of pie

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