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Suppose the price of bananas is $4 per pound and the price of peaches is $8. If a...

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yaga49 | Valedictorian

Posted May 11, 2013 at 11:54 AM via web

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Suppose the price of bananas is $4 per pound and the price of peaches is $8. If a person gets 40 units of added utility from eating the last pound of peaches he consumes, how many units of added utility would he have to get from eating the last pound of bananas to be in consumer equilibrium.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 11, 2013 at 1:22 PM (Answer #1)

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In this case, the hypothetical consumer would have to get 20 units of added utility from eating the last pound of bananas in order to be in consumer equilibrium.

Consumer equilibrium is a state in which the last dollar spent on one good or service gives the person buying the same amount of marginal utility that he would get if he spent that dollar on any other good or service.  In this example, the man has two choices, bananas or peaches.  To be in consumer equilibrium, he has to get the same marginal utility (the same thing as added utility) from his last dollar spent on bananas as he got on the last dollar he spent on peaches. 

So, we have to find out how much marginal utility he got from the last dollar he spent on peaches.  He spent $8 and got 40 units of marginal utility.  This means he got 5 units of utility per dollar spent.  Now, we have to find out how many units of utility he would need to get from the bananas.  They cost $4 per pound and he needs to get 5 units of utility per dollar.  Since 5*4=20, he needs to get 20 units of added utility from eating the last pound of bananas.  He only needs half as much utility because the price of bananas is only half of the price of peaches.

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