QUESTION 1 to purchase 5 cans of Pepsi and 3 hamburgers per

QUESTION 1 to purchase 5 cans of Pepsi and 3 hamburgers per week. The price of Pepsi is $2 per can, the price of a hamburger Bill currently uses his entire budget is $1, Bi\'s marginal utility from Pepsi ls 4, and his marginal utility from hamburgers is A) increasing Pepsi consumption and reducing hamburger consumption B) increasing hamburger consumption and reducing Pepsi consumption C) maintaining his current consumption choices 3. Bill could increase his utility by D) We do not have enough information to answer this question

Solution

Option B

Bill\'s optimal consumption will be at the point where -

MRS = Price ratio

MRS = MU_Pepsi/MU_Ham = 4/3

Price ratio = P_Pepsi/P_Ham = 2/1 = 2

We can see that MRS < Price ratio.

The law of diminishing marginal returns is applicable to both goods.

To increase value of MRS, Pepsi consumption must be reduced and Hamburger consumption must be increased.