In a situation where Mux represent the marginal utility of product X
while Px represent the price respectively. Utility can be maximized when
Answer Details
Utility can be maximized when the marginal utility of a product divided by its price, known as the marginal utility per unit of money spent, is equal across all goods. In other words, utility is maximized when the consumer is spending their limited budget in such a way that the last unit of money spent on each good yields the same marginal utility.
Mathematically, this can be expressed as:
MUX/PX = MUY/PY = MUZ/PZ = ...
Where MUX, MUY, MUZ, etc. represent the marginal utilities of products X, Y, Z, etc., while PX, PY, PZ, etc. represent their respective prices.
To understand this concept in simple terms, consider a situation where you have a limited budget and are trying to decide how to spend it on different goods. If you have $10 and are trying to decide between buying a book for $5 and a movie ticket for $5, you would choose the option that provides the most utility for each dollar spent.
If the marginal utility of the book is higher than the marginal utility of the movie ticket, then you would choose to buy the book. However, if the marginal utility of the movie ticket is higher than the marginal utility of the book, then you would choose to buy the movie ticket.
Ultimately, the goal is to allocate your budget in such a way that the marginal utility per unit of money spent is the same for all goods, which will result in the highest overall level of utility or satisfaction.