Answer to Question #92179 in Microeconomics for ash

Question

Mrs. Wilson buys loaves of bread and quarts of milk each week at prices of CAD1 and CAD0.80, respectively. At present she is buying these two products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70 utils, respectively. Is she buying the utility-maximizing combination of bread and milk? If not, how should she reallocate her expenditures between the two goods?

Answer 1

Q1 Answer No. Let suppose that bread is Product 1 and milk is Product 2. According to Utility Maximization rule :

$$MU1/P1 = MU2/P2$$

Since 80/1<70/0.8 then Mrs. Wilson isn't maximizing her utility

Q2 Answer buy more milk and less bread. If Mrs. Wilson starts buying more milk her MU from the last product will decrease (law of decreasing marginal utility) and the ratio 70/0.8 will decrease as well