Question

Assume a consumer has maximized her utility by buying two products: cupcakes and cheese. Her marginal utility for the last cupcake is 30. If the price of cupcakes is $3 and the price of cheese is $5, how much is her marginal utility for her last unit of cheese?

Answer 1

50

Step-by-step explanation:

In maximizing utilty the ratio of marginal utilities of both goods, which is called the Marginal Rate of Substitution (MRS), must be equal to the prices ratio.

Here, the ratio of prices (cupcakes over cheese) is 3/5. So, the MRS (marginal utility of cupcakes (Ucc) over marginal utility of cheese(Uch))) must be 3/5.

As Ucc=30, then 30/Uch = 3/5. So, Uch = 50.