Suppose that at Miles\'s current level of consumption, his marginal utility from

Question

Suppose that at Miles's current level of consumption, his marginal utility from a pizza is 10 utils, and his marginal utility from a pint of ice cream is 16 utils. If the price of a pizza is $8, and the price of a pint of ice cream is $5, is Miles maximizing his utility?

a. Yes. He should not change his spending on frozen pizza and ice cream.

b. No. He should shift his spending away from ice cream and towards frozen pizza.

c. No. He should buy less frozen pizza and less ice cream.

d. No. He should shift his spending away from frozen pizza and towards ice cream.

Explanation / Answer

Option D. Since Mu of pizza / price of pizza = 1.25 is less than MU of ice cream / price of ice cream = 3.2, Thus, consumption of frozen pizza should be reduced to increase Mu of pizza / price of pizza and ice cream should be increased to reduce MU of ice cream / price of ice cream to equate both the sides.

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