Author Question: Explain why total utility is maximized when the marginal utility per dollar on all goods is equal. ... (Read 162 times)

arivle123 · **on:** Jun 29, 2018

Explain why total utility is maximized when the marginal utility per dollar on all goods is equal.

What will be an ideal response?

Question 2

The market for maple syrup is perfectly competitive. Suppose that the market is in long-run equilibrium when the market demand for maple syrup increases. In the long run, firms will ________ the market and the market ________ will ________.

A) leave; supply; decrease
B) enter; supply; increase
C) leave; demand; decrease
D) enter; supply; decrease

Zebsrer · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

It is easiest to prove that total utility is maximized when the marginal utility per dollar is equal across goods by looking at a situation in which the marginal utility per dollar is NOT equal across goods. If the marginal utility per dollar is 5 for good X and 8 for good Y, then the consumer could reallocate one dollar away from good X (losing 5 units of utility) and towards good Y (gaining 8 units of utility). The net result is a gain of 3 units of utility, for an increase in total utility. Hence whenever the marginal utility per dollar is not equal, the consumer can always rearrange his or her consumption and increase his or her total utility. Therefore the total utility cannot be at its maximum when the marginal utility per dollar differs for different goods. Only when all goods have the same marginal utility per dollar is it impossible for the consumer to reallocate funds and become better off. Hence at this point the consumer must have the maximum total utility.

Answer to Question 2

B