Exhibit 10-1 A consumer is faced with choosing between hamburgers and milkshakes

Question

Exhibit 10-1 A consumer is faced with choosing between hamburgers and milkshakes that are priced at $2 and $1, respectively. The marginal utility derived from each of the two goods is as follows Marginal Utility of Hamburgers in Utils 20 16 14 10 8 Quantity of Hamburgers Consumed Each Week 2 Marginal Utility of Milkshakes in Utils 12 10 Quantity of Milkshakes Consumed Each Week 2 4 Refer to Exhibit 10-1. How many hamburgers and milkshakes will be consumed if the consumer maximizes his utility subject to $14 of income each week? a. 5 hamburgers and 4 milkshakes b. 4 hamburgers and 5 milkshakes c. 3 hamburgers and 4 milkshakes d. 4 hamburgers and 3 milkshakes

Explanation / Answer

Ans: 5 hamburgers and 4 milkshakes

Explanation:

Total utility is maximized at the quantitu combination of two goods where:

MUh / Ph = MUm / Pm

8 / $2 = 4 / 1 = 4

So, the consumer will purchase 5 hamburger at $10 (i.e. $2 * 5) and 4 milhshakes at $1 (i.e., $1 * 4). The total expenditure = $10 + $4 = $14.

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