Question

A consumer with a limited income will maximize utility when each good is purchased in amounts such that the

A. Total utility is the same for each good in a bundle
B. Marginal utility of each good in a bundle is maximized
C. Marginal utility per dollar spent on each of the final choices in a bundle is equal
D. Marginal utility per dollar spent on each of the final choices in a bundle is maximized for each good

Answer 1

A consumer with a limited income maximizes utility when the marginal utility per dollar spent on each of the final choices in a bundle is maximized for each good.

Step-by-step explanation:

When a consumer with a limited income maximizes utility, each good should be purchased in amounts such that the marginal utility per dollar spent on each of the final choices in a bundle is maximized for each good. This means that the consumer should allocate their budget in a way that maximizes the additional satisfaction (marginal utility) they get from each dollar spent on each good.

For example, if the marginal utility per dollar spent on Good A is higher than that of Good B, the consumer should allocate more of their budget towards Good A.

To determine the utility-maximizing choice, one can compare the ratio of the marginal utility to price of Good A with the ratio of the marginal utility to price of Good B and ensure that they are equal. This ensures that the consumer allocates their budget in the most efficient way.