How to Maximize Your Utility with Cake and Salad Choices
How can you determine how much cake and salad to eat to maximize your utility?
If your utility schedule is like the one above, and the price of a piece of cake is $1 and the price of a salad is $3, how many pieces of cake should you eat if you have a budget of $25?
Answer:
To maximize your utility with a budget of $25, you need to calculate the marginal utility per dollar for each item - cake and salad.
First, calculate the number of salads you can buy with your budget: $25 / $3 = 8 salads (and a remainder of $1).
Since the price of a piece of cake is $1, you can use the remainder to buy 1 piece of cake.
In this scenario, you would have spent your entire budget ($25) and maximized your utility by purchasing 19 pieces of cake and 8 salads.
Detailed Explanation:
To determine how much cake and salad to eat to maximize your utility, you need to consider the marginal utility per dollar for each item based on the utility schedule provided.
Calculating the marginal utility per dollar for cake involves dividing the utility gained from each piece of cake by its price. Similarly, you need to do the same for salad.
By dividing the utility gained from the first piece of cake by its price ($1), you can determine the marginal utility per dollar for cake. Repeat the same process for salad.
Once you have calculated the marginal utility per dollar for each item, choose the combination of cake and salad that gives you the most marginal utility per dollar within your budget.
In the scenario provided, purchasing 19 pieces of cake and 8 salads with a budget of $25 would help you maximize your utility by optimizing your choices based on the calculations.