Consider the following information for Lisa, who only consumes two goods: doughn

Question

Consider the following information for Lisa, who only consumes two goods: doughnuts and coffee.

The marginal utility of doughnuts is 50 utils and the marginal utility of coffee is 20 utils. The price of coffee is $2.

a) Suppose the price of doughnuts is $2. Does Lisa currently derive more satisfaction per dollar spent on doughnuts or coffee? Explain in a sentence how you arrived at your answer.

b) What would the price of doughnuts need to be in order for Lisa to be maximizing her total utility? Explain in a sentence how you arrived at your answer.

Explanation / Answer

a. If the price of Doughnuts is $2 and utility of dougnuts is $50 utils then Lisa will certainly derive more stisfaction on doughnuts per dollar. As the util of per unit of coffe is 20 util.

b. To maximize her total utility the price price of doughnut should be low or as same as the coffee so that she can increase her utility either spending the same amount or some lower amount for the good.

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