To maximize utility, why does a consumer consume the combination of goods that equates marginal utility per dollar on the different goods rather than just equating the marginal utility of the different goods?
What will be an ideal response?
The consumer equates the marginal utility per dollar on the goods because goods have different prices. For instance, the marginal utility of a Porsche might be 120,000 units and the marginal utility of a Hyundai might be 60,000 units. The consumer certainly prefers the Porsche to the Hyundai because the former has a greater marginal utility than the latter. However, we did not consider the prices. If the Porsche costs $120,000 and the Hyundai costs $10,000, the marginal utility per dollar on the Porsche is 1 and the marginal utility per dollar on the Hyundai is 6. A Hyundai gives the consumer more utility per dollar. Thus, when maximizing total utility, the consumer compares the marginal utility per dollar, not the marginal utility.
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