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28 November, 05:25

Alex has allocated his income in such a way that the marginal utility of the last unit of product X he consumes is 40 utils and that of the last unit of Y is 16 utils. If the unit price of X is $5, then the price of Y must be

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  1. 28 November, 06:45
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    Price of y (Py) = $2 per unit

    Explanation:

    Marginal utility can be defined as the additional utility of a consumer as a result of the additional unit of goods consumed.

    Let

    Marginal utility of x = MUx

    Marginal utility of y=MUy

    Price of x=Px

    Price of y=Py

    Given

    MUx=40 utils

    MUy=16 utils

    Px=$5

    Py=?

    Then,

    MUx/Px=MUy/Py

    40utils/$5=16 utils/Py

    8 utils/$ = 16utils/Py

    Make Py subject of the formula by cross multiplying

    Py*8 = 16

    Py=16/8

    Py=$2 per Unit

    Price of y=$2 per unit
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