Answer to Question #250994 in Microeconomics for Samuel

Question

1. Suppose a particular consumer has 8 birr to be spent on two goods, A and B. The unit price of good A is 2 birr and the unit price of B is 1 birr. The marginal utility (MU) she gets from consumption of the goods is given below.
Quantity
MUA MUB
1 36 30
2 24 22
3 20 16
4 18 12
5 16 10
6 10 4
A) Based on the cardinal analysis, what is the combination of the two goods that gives maximum utility to the consumer?
B) What is the total utility at the utility maximization level?

Answer 1

We are given with the following information:

Cardinal Utility approach tells us that the consumer can express the utility derived from consumption of a good in numeric value (utilis)

A) Following will be the best combination of two goods that gives maximum Utility to the consumer:

The consumer should buy that good first which gives the maximum utility considering the limited budget of $8.

For example, For the first consumption the consumer will but good A as it gives the maximum utility of 36.

For the second consumption the consumer will prefer good B as it gives maximum utility now i.e, 30.

This will go on till the whole budget is utilized.

Following table shows the budget used, budget left, utility and the combination of both goods A and B for maximum utility.

B) the Total utility at maximum utility consumption is 132.