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marginal utility is associated with the consumption of one or both goods

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Ch03
sol 03, sol 03, Ch07

12. The price of computers has fallen substantially over the past two decades. Use this drop in price

marginal utility is associated with the consumption of one or both goods.
The equal marginal principle states that to obtain maximum satisfaction the ratio of the marginal utility to price must be equal across all goods. In other words, utility maximization is achieved when the budget is allocated so that the marginal utility per dollar of expenditure (MU/P) is the same for each good. If the MU/P ratios are not equal, allocating more dollars to the good with the higher MU/P will increase utility. As more dollars are allocated to this good its marginal utility will decrease, which causes its MU/P to fall and ultimately equal that of the other goods. If marginal utility is increasing, however, allocating more dollars to the good with the larger MU/P causes MU to increase, and that good’s MU/P just keeps getting larger and larger. In this case, the

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Pindyck/Rubinfeld, Microeconomics, Eighth Edition Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. consumer should spend all her income on this good, resulting in a corner solution. With a corner solution, the equal marginal principle does not hold.
12. The price of computers has fallen substantially over the past two decades. Use this drop in price
to explain why the Consumer Price Index is likely to overstate substantially the cost-of-living

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