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5 August, 12:39

Suppose apples come in two quality levels, low quality and high quality. At a store in the apple-growing region, the price of low-quality apples is $1 per pound, and the price of high-quality apples is $4 per pound.

Timmy lives in the apple-growing region and buys 8 pounds of each type. His marginal utility of low-quality apples is 3 utils and his marginal utility of high-quality apples is 12 utils.

1. Is Timmy maximizing his utility?

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  1. 5 August, 13:51
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    Yes.

    Explanation:

    Given that,

    Price of low-quality apples = $1 per pound

    Price of high-quality apples = $4 per pound

    Marginal utility of low-quality apples = 3 utils

    Marginal utility of high-quality apples = 12 utils

    Equimarginal:

    (Marginal utility of low quality apples : Price per apple) = (Marginal utility of high quality apples : Price per apples)

    (3 utils : $1) = (12 utils : $4)

    3 = 3

    Yes, Timmy is maximizing his utility as his equimarginal utility is same for both the goods as shown above.
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