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Above is a utility schedule for your grandmother. Assume the equilibrium price of Product A is $5 and the equilibrium price of Product B is $2, and your grandmother can only consume these two goods. How many units of Product B do you suggest your grandmother purchase if you want her to maximize her utility and she only has $14 to spend on both goods?

Respuesta :

Answer:

Grandmother should purchase 2 units of both products

Explanation:

Let's denote

MU = Marginal utility

P = Price

Q = Quantity

The Utility will be maximum when both unit's MU/P is equal

Product A

Q       MU     P      MU/P

1         80    $5       16

2        40    $5       8

3        30    $5       6

4        15    $5        3

5         7      $5       1.4

6         6     $5        1.2

7         5      $5         1

8         3     $5        0.6

Product B

Q       MU     P      MU/P

1         30    $2       15

2        16     $2       8

3        15     $2       7.5

4        14     $2        7

5         13    $2       6.5

6         12    $2        6

7          11    $2        5.5

8         10  $2        5

As you can see above MU/P is same when grandma purchase 2 product each to maximize utility.

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