Question

Jennifer is trying to decide between a cup of coffee and a glass of orange juice. The coffee costs $1 and yields 10 units of additional utility. The juice costs $2 and yields 16 units of additional utility. If Jennifer follows the principle of rational choice, she will buy:______________.

Answer 1

coffee since it gives her the most marginal utility per dollar

Step-by-step explanation:

Cost of a cup of coffee = $1 and yield = 10 units of additional utility

Cost of a glass of juice = $2 and yield = 16 units of additional utility

In this case, the decision is based on the per dollar marginal utility.

Per dollar marginal utility for coffee:

= Marginal utility ÷ cost of coffee

= 10 ÷ $1

= 10

Per dollar marginal utility for juice:

= Marginal utility ÷ cost of juice

= 16 ÷ $2

= 8

Therefore, the above calculation states that if Jennifer follows the principle of rational choice then she will buy coffee because it will her the higher marginal utility per dollar.