Multiple Choice
Which of the following features about a buyer indicates that the buyer has high bargaining power?
77
views
5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
Multiple Choice
Which of the following decision-making strategies is just as good as maximizing the ratio MU/Price for each good when allocating a consumer's budget?
A
Choosing a bundle where the marginal utility per dollar is equal for all goods
B
Purchasing only the good with the highest marginal utility
C
Spending the entire budget on the cheapest good
D
Maximizing total utility without considering prices
Verified step by step guidance1
Understand that the marginal utility per dollar spent on a good is given by the ratio \(\frac{MU}{P}\), where \(MU\) is the marginal utility of the good and \(P\) is its price.
Recognize that the consumer's goal in utility maximization with a budget constraint is to allocate spending so that the marginal utility per dollar is equalized across all goods, i.e., \(\frac{MU_1}{P_1} = \frac{MU_2}{P_2} = ... = \frac{MU_n}{P_n}\) for all goods \$1\( to \)n$.
Note that choosing a bundle where the marginal utility per dollar is equal for all goods ensures no reallocation of spending can increase total utility, which is the condition for optimal consumption under a budget constraint.
Compare this strategy to other options: purchasing only the good with the highest marginal utility ignores prices, spending only on the cheapest good ignores utility, and maximizing total utility without considering prices ignores the budget constraint.
Conclude that the strategy of equalizing marginal utility per dollar across all goods is just as good as maximizing the ratio \(\frac{MU}{P}\) for each good, as it directly reflects the consumer's optimal allocation of their budget.
Related Videos
Related Practice
