mux/px=muy/py<muz/pz, there are 3 goods and z has a larger mu per dollar than x and y. so how does a consumer rectify this maximize satisfaction?
To maximize satisfaction given the information provided, the consumer should allocate more of their budget towards good z and less towards goods x and y. This will allow them to take advantage of the higher marginal utility per dollar of good z.
To explain this in more detail:
1. Determine the marginal utility per dollar (MU/Price) for each good:
- Calculate MUx/Px: Dividing the marginal utility of good x by its price.
- Calculate MUy/Py: Dividing the marginal utility of good y by its price.
- Calculate MUz/Pz: Dividing the marginal utility of good z by its price.
Note: The marginal utility represents the additional satisfaction derived from consuming one additional unit of a good.
2. Compare the ratios:
- If MUz/Pz > MUx/Px and MUz/Pz > MUy/Py, it means that good z provides the highest marginal utility per dollar compared to goods x and y. Therefore, it is more beneficial for the consumer to allocate more budget towards good z.
3. Allocate the budget:
- The consumer should increase their consumption of good z, ensuring that the marginal utility per dollar remains higher compared to goods x and y.
- At the same time, they should reduce their consumption of goods x and y since their marginal utility per dollar is lower.
By strategically allocating their budget towards the good with the highest MU/Price ratio (in this case, good z), the consumer can maximize their satisfaction given the preferences and prices of the goods available.