Modern Principles of Economics
Modern Principles of Economics
4th Edition
ISBN: 9781319098728
Author: Tyler Cowen, Alex Tabarrok
Publisher: Worth Publishers
Question
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Chapter 25, Problem 1FT
To determine

Utility maximization.

Expert Solution & Answer
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Explanation of Solution

The person’s income is $100 and the person spends all the money to buy a meal, which costs $10 per meal. Thus, the person buys10 (10010) meal. The marginal utility deriving from the 10 unit is $5. The price of a movie is $10. Substitute the respective values in Equation (1) to verify whether the person has maximized the utility or not.

Marginal utilityMoviePriceMovie=Marginal utilityMealPriceMeal05=5100<0.5

Since the meal’s marginal utility per dollar is greater than the marginal utility per dollar for the movie, it is concluded that the person did not maximized his utility.

Economics Concept Introduction

Concept Introduction:

Utility maximization: When a person consumes two different goods simultaneously, the person can maximize his or her utility at the point where the marginal utility per dollar derived from both the goods becomes equal. This can be written as follows:

Marginal utilityAPriceA=Marginal utilityBPriceB (1)

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