Lata likes to eat burgers and has already eaten two. Her marginal utility from the last burger she consumes is 90 utils. If the price of burger is Rs. 25 per unit and marginal utility of a rupee is 3 utils, then?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Lata should increase the consumption of burgers to attain equilibrium.
For a consumer to be in equilibrium, the following condition must hold:
$MU_x$ / $P_x$=$MU_m$, where
$MU_x$ = Marginal Utility of the good
$P_x$ = price of the Good
$MU_m$ =Marginal Utility of Money
Given: $MU_x$ = 90 utils , $P_x$ =25, $MU_m$ =3
$MU_x$ / $P_x$= 90 / 25 = 3.6
Thus, $MU_x$ / $P_x$ > $MU_m$
This means the utility gained per rupee spent on burgers is greater than the utility from money itself. So, Lata should increase her consumption of burgers until equilibrium is achieved, i.e., until $MU_x$ / $P_x$=$MU_m$.