Benny spends all his money buying wine and cheese.?

Question

The marginal utility of the last bottle of wine is 60, and the marginal utility of the last block of cheese is 30. The price of wine is $3, and the price of cheese is $2. Benny

a. is buying wine and cheese in the utility-maximizing amounts

b. should buy more wine and less cheese

c. should buy more cheese and less wine

d. is spending too much money on wine and cheese

Answer 1

huh?

Answer 2

b. should buy more wine and less cheese

In order to be in equilibrium consumer should satisfy condition MU1/P1=MU2/P2=...=MUn/Pn

But Benny currently have:

MU(w)/P(w) ≠ MU(c)/P(c)

60/3 ≠ 30/2

20 ≠ 15

Thus since prices are fixed he should decrease MU of wine (by consuming more) and increase MU of cheese (by consuming less).

Answer 3

B

if he buys wine, he gets 20 utility for a dollar. If he buys cheese, he only gets 15 utility for a dollar. So wine gets him more utility for his money.