Question

Assume that product Alpha and product Beta are both priced at $1 per unit and that Ellie has $20 to spend on Alpha and Beta. She buys 8 units of Alpha and 12 units of Beta. The marginal utility of Alpha is 40 and the marginal utility of Beta is 20. This indicates that:____________
a) Ellie should make no change in consumption
b) Given another dollar, Ellie should buy an additional unit of Beta
c) In order to maximize utility, Ellie should buy more of Beta and less of Alpha
d) In order to maximize utility, Ellie should buy more of Alpha and less of Beta

Answer 1

Answer: The correct answer is "d) In order to maximize utility, Ellie should buy more of Alpha and less of Beta".

Explanation: This indicates that in order to maximize utility, Ellie should buy more of Alpha and less of Beta, because the alpha product gives Ellie a greater utility than the beta product, so since each product is worth $ 1, to maximize its utility Ellie should buy as many Alpha products as she want until the utility she get by buying one more of these is less than the utility she would get from buying a Beta product.