Chapter 19: Problem 18

Colin Kelley maximizes his utility when (LO4) a) the marginal utility of everything he buys is equal to its price b) the marginal utility of everything he buys is zero c) he no longer enjoys a consumer surplus d) he buys only the lowest-priced goods and services

Short Answer

Expert verified

The correct answer is \(a\): Colin Kelley maximizes his utility when the marginal utility of everything he buys is equal to its price.

Step by step solution

Option A: Marginal utility equals price

This option suggests that Colin maximizes his utility when the marginal utility of everything he buys is equal to its price. This means that the additional satisfaction he gets from purchasing each product is equal to the amount he spends on it.

Option B: Marginal utility is zero

This option states that Colin maximizes his utility when the marginal utility of everything he buys is zero. This means that he would not get any additional satisfaction from purchasing more goods or services. This option doesn't make economic sense as it doesn't lead to the maximization of utility.

Option C: No consumer surplus

This option suggests that Colin maximizes his utility when he no longer enjoys a consumer surplus. Consumer surplus is the difference between the amount a consumer is willing to pay and the amount they actually paid. A consumer maximizing utility would consider both price and the amount of enjoyment they get from a product. Thus, this option is not correct.

Option D: Only lowest-priced goods and services

This option says that Colin maximizes his utility when he buys only the lowest-priced goods and services. This might not be the best option for maximizing utility, as the satisfaction from different goods and services depends on their respective qualities and the consumer's preferences. A consumer maximizing their utility would balance the price they pay for each product and the satisfaction they get from it. Considering the analysis, the correct answer is:

Final Answer

\(a)\): Colin Kelley maximizes his utility when the marginal utility of everything he buys is equal to its price. This option represents the idea that a consumer maximizes their utility when they allocate their spending in such a way that the marginal utility per dollar spent on each product is equal.