Mrs. Wilson buys loaves of bread and litres of milk each...

Mrs. Wilson buys loaves of bread and litres of milk each week at prices of $$\$ 1$$ and $$\$ .80$$, 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 utilitymaximizing combination of bread and milk? If not, how should she reallocate her expenditures between the two goods?

Key Concepts

Budget Reallocation

Budget reallocation involves adjusting the distribution of spending across different goods to achieve equal marginal utility per dollar, as mandated by the utility maximization condition. This strategy ensures that resources are used most efficiently, and any deviation from equal margins indicates the potential for increased overall satisfaction by shifting expenditures toward goods offering higher marginal benefits relative to their cost.

Utility Maximization Condition

The utility maximization condition states that a consumer attains maximum utility when the marginal utility per dollar is equalized for all goods. In other words, to maximize satisfaction given a budget constraint, resources should be allocated such that no reallocation of spending can yield a higher level of overall utility.

Marginal Utility per Dollar

Marginal utility per dollar is calculated by dividing the marginal utility of a good by its price. This measure helps determine how much additional satisfaction is obtained per unit of currency spent. It is crucial for comparing the relative efficiency of spending across different goods and guiding consumers to maximize total utility.

Marginal Utility

Marginal utility is the additional satisfaction or benefit a consumer gains from consuming an extra unit of a good or service. This concept is fundamental in understanding consumer behavior and decision-making, as it explains how the value of additional consumption tends to decrease as more units are consumed, a notion known as diminishing marginal utility.

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