QUESTION 5

The table below shows the marginal utility of good A, good B

and good C for Betty.

Unit of
goods

Marginal
Utility for
good A
(MUA)

Marginal
Utility for
good B
(MUB)

Marginal
Utility for
good C
(MUC)

18

39

12

16

36

10

14

33

12

30

10

27

24

(a) Suppose Betty has RM26 to spend on these three goods. The
prices of good A, good B and good C are RM2, RM3 and RM1
respectively. What combination of three goods should be
purchased in order to maximise utility?
To maximize utility, we use the Utility Maximizing Rule :
MUA/ PA= MUB/ PB = MUC/PC
STEP 1 Calculate the MU/P = Marginal Utility per dollar
Price : A = RM2, B = RM3, C = RM1
QA

MUA

MUA/PA

QB

MUB

MUB/PB

QC

MUC

MUC/PC

18

39

13

12

12

16

36

12

10

10

14

33

11

12

30

10

MUA/ PA= MUB/ PB = MUC/PC

16 utils/RM2 = 24 utils/RM3 = 8 utils/RM1

So betty should purchase 2 units of good A, 6 units of good B and 4 units of

good C to maximise her utility.
2PA + 6PB + 4PC = 2(RM2) + 6(RM3) + 4(RM1)
= RM26

What will she buy first?

The first B gives you 13 units of satisfaction per dollar which is
more than the first A or C. So buy 1 B
What will she buy next?
The second B and the first C both give 12 units of satisfaction
per dollar, so buy them.
What will she buy next?
The third B since it gives 11 units of satisfaction per dollar than
the others.
What is next?
Keep shopping until you have spent all of your money.

(b) Based on the answer above, what is the total utility derived
by Betty?
Unit of
goods

MUA

TUA

MUB

TUB

MUC

TUC

18

18

39

39

12

12

16

34

36

75

10

22

14

48

33

108

31

12

60

30

138

39

10

70

27

165

46

78

24

189

52

2 units of good A, 6 units of good B and 4 units of good C

TUA + TUB+ TUC = 34 + 189 + 39

= 262