11.07.2022 - 19:16

# In May and June, Tammy spent all her clothing budget on bathing suits and beach bags. Each bathing suit cost $75. At Tammy’s optimal choice, her marginal utility from the last bathing suit purchased is 300 and her marginal utility from the last beach bag Question: In May and June, Tammy spent all her clothing budget on bathing suits and beach bags. Each bathing suit cost$75. At Tammy’s optimal choice, her marginal utility from the last bathing suit purchased is 300 and her marginal utility from the last beach bag purchased is 200. This means that each handbag must cost:

a) $25 b)$100

c) $50 d)$150

The correct answer is c) $50. The optimal choice for Tammy is to allocate her budget in a way that the marginal utility per dollar spent on each item is equal. In other words, she will buy more of an item until the marginal utility per dollar spent on that item is equal to the marginal utility per dollar spent on the other item. Given that Tammy's marginal utility from the last bathing suit purchased is 300 and the cost of each bathing suit is$75, her marginal utility per dollar spent on bathing suits is 300/75 = 4. Similarly, given that Tammy's marginal utility from the last beach bag purchased is 200, her marginal utility per dollar spent on beach bags is 200/x, where x is the cost of each beach bag. Since the marginal utility per dollar spent on both items must be equal at the optimal choice, we can set up the following equation: 4 = 200/x Solving for x, we get x = $50. Therefore, each beach bag must cost$50 for Tammy's optimal choice.