Question

Suppose marginal utility of good X is 20 while its price is Rs. 4 per unit and marginal utility of Y good is 50 while its price is Rs.5 per unit .The individual to whom this information applies is spending 20 on each good .Is he maximizing his satisfaction.?

Answer 1

We have the following information-

• Marginal utility of good X: MUx = 20
• Marginal utility of good y: MUy = 50
• Px = Rs 4 per unit
• Py = Rs 5 per unit
• I = 20 on each good.

The first-order condition for maximizing utility is given as-

$MRS =\frac{Px}{Py}$

Where $MRS =\frac{MUx}{MUy}$

so

$\frac{MUx}{MUy} =\frac{ Px}{Py}\\=\frac{20}{50}=\frac{2}{5}\\\frac{Px}{Py}=\frac{4}{5}$

Since, MRS $≠\frac{Px}{Py}$ So, the level of satisfaction is not maximized.