Question

9. Melika spends all of her income on magazines and carry-out lunches. The price of a magazine is $5, and the price of a carry-out lunch is $7. At the current consumption bundle, the marginal utility of magazines is 10, and the marginal utility of carry-out lunches is 21. Assuming that diminishing marginal utility applies to both goods, to maximize utility given her income, Melika should:A. increase her consumption of magazines and decrease her consumption of carry-out lunches.

B. consume equal amounts of magazines and carry-out lunches.
C. increase her consumption of carry-out lunches and decrease her consumption of magazines.
D. continue to consume the current bundle.

Answer 1

Option C (increase her consumption of carry-out lunches and decrease her consumption of magazines) is the correct answer.

Step-by-step explanation:

The marginal utility offered by carryout lunches is higher than the marginal utility provided by the use of magazines in proportion to the total spending required on them respectively. Melika will be able to derive maximum utility if she increases her consumption of carry-out lunches as the loss from decrease in the consumption of magazines will be compensated by the higher use of carry-out lunches.