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How do you calculate the utility-maximizing combination of goods for a consumer?

Posted on April 18, 2014 at 10:10 AM

When a buyer purchases two types of goods, we can determine the utility-maximizing quantities of each good using the following equation:

 

Marginal Utility of X / Price of X = Marginal Utility of Y / Price of Y

  

The ratios must equal one another. If you need the MU / P to decrease, then buy more units of that good. This is because of the law of diminishing marginal utility (as you buy additional units, marginal utility decreases).

 

If you need the MU / P to increase, then buy less of the good.

  

AP Microeconomics Unit 1 Basic Economic Concepts

Categories: AP Microeconomics, Micro Unit 1 Basic Economic Concepts

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