Answer to Question #254634 in Microeconomics for Kakai

Question

What is the rule relating the ratio of marginal utility to price of two good at the optimal choice ? Explain why if this rule does not hold the choice cannot be utility maximizing

Answer 1

At optimal choice, the ratio of utilities between two goods should be 1. Otherwise, further utility could be gained by substituting on good for the other. The problem of finding consumer equilibrium, that is , the combination of goods and services that will ,maximize an individual's total utility, comes down to comparing the trade-offs between one affordable combination with all the other affordable combinations. Most people approach their utility maximizing combination of choices in a step by step way