A rational consumer spends all of her income on two goods: Apple and Banana. Suppose
the last dollar spent on Apple increased her total utility from 60 utils to 68 utils and the last
dollar spent on Banana increased her total utility from 25 utils to 29 utils. If the price of a
unit of Apple is 2 Birr, what is the price of a unit of Banana at equilibrium
To determine the price of a unit of Banana at equilibrium, we need to compare the marginal utilities per dollar spent on Apple and Banana.
The marginal utility per dollar spent on Apple is calculated as the change in total utility divided by the change in expenditure on Apple:
MU(Apple) = (68 utils - 60 utils) / (1 Birr * 2) = 4 utils/Birr
The marginal utility per dollar spent on Banana is calculated in the same way:
MU(Banana) = (29 utils - 25 utils) / (1 Birr * P) = 4 utils/Birr
Since the marginal utility per dollar spent on both goods is the same, they provide the consumer with equal satisfaction for each additional Birr spent. This means that the consumer is consuming the goods optimally, and we have reached equilibrium.
Therefore, the price of a unit of Banana at equilibrium is P = 2 Birr.