Harry Mazzola has the utility function U(x₁, x₂)  minx₁  2x₂, 2x₁  x₂.He has $40 to spend on corn chips and french fries.If the price of corn chips is $4 per unit and the price of french fries is $2 per unit, then Harry will

A) definitely spend all of his income on corn chips.
B) definitely spend all of his income on french fries.
C) consume at least as many corn chips as french fries but might consume both.
D) consume at least as many french fries as corn chips but might consume both.
E) consume equal amounts of french fries and corn chips.

Question

Katsuyoshi Kimishima · Accepted Answer

Final Answer : D, Explanation :  To maximize utility, Harry should allocate his income in such a way that the marginal utility per dollar spent is equal for both goods. Using the given utility function, we can calculate the marginal utility of each good as:MUcorn chips = 2/x 1 MUfrench fries = 1/x 2 Dividing the marginal utility of corn chips by the price, we get:MUcorn chips / Pc = 2/4x 1  = 1/2x 1 Dividing the marginal utility of french fries by the price, we get:MUfrench fries / Pf = 1/2x 2 In order for the marginal utility per dollar spent to be equal for both goods, we need:MUcorn chips / Pc = MUfrench fries / PfSubstituting in the expressions we derived, we get:1/2x 1  = 1/2x 2 Cross-multiplying and simplifying, we get:x 1  = x 2 This means that Harry should consume at least as many french fries as corn chips, but he might consume both. Since the price of french fries is lower, it's more likely that he will consume more french fries than corn chips, so the answer is (D) consume at least as many french fries as corn chips but might consume both.

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