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) Price of both doughnut and coffee is same i.e. $2 but in case of doughnut the utility earned by spending $2 is 50 which is much more than that of coffee which is 20 by spending the same amount. So Lisa will derive more satisfaction per dollar when spending on doughnut.

b) Utility is maximized when

MUd/MUc = Pd/Pc

50/20=Pd/2

Pd=5 so price of doughnuts shouls be $5 to miximize utility.

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