At the optimal consumption bundle
A the marginal utility of all goods consumed is equal.
B the marginal utility per dollar spent is equalized across all goods consumed.
C the price of all goods consumed is equal.
D total utility from all goods consumed is equal.
The correct answer and explanation is :
Correct Answer: B. The marginal utility per dollar spent is equalized across all goods consumed.
Explanation:
In consumer theory, the optimal consumption bundle refers to the combination of goods and services that maximizes a consumer’s total utility given their budget constraint. The key to identifying this optimal bundle lies in understanding how consumers allocate their limited income to derive the greatest satisfaction.
Marginal utility (MU) refers to the additional satisfaction a consumer gains from consuming one more unit of a good. However, since goods often have different prices, it’s not enough to compare marginal utilities directly. Instead, consumers compare the marginal utility per dollar spent (MU/P) on each good. This ratio tells the consumer how much “bang for their buck” they’re getting from each item.
At the optimal consumption point, a rational consumer allocates their budget such that the marginal utility per dollar spent is equal across all goods consumed. This condition is known as the equimarginal principle and can be expressed mathematically as:
$$
\frac{MU_x}{P_x} = \frac{MU_y}{P_y}
$$
This means that if the marginal utility per dollar of good X is higher than that of good Y, the consumer can increase total utility by spending more on X and less on Y. This reallocation continues until the marginal utility per dollar is equal across all goods.
Let’s address the incorrect options:
- A is wrong because marginal utility itself may differ across goods.
- C is wrong because goods typically have different prices.
- D is incorrect since total utility from each good can vary greatly depending on quantity consumed.
In conclusion, B accurately captures the condition that must hold at the optimal consumption bundle: equal marginal utility per dollar spent on all goods.