Sally Garcia Devotes All of Her Income to the Consumption

question 107

Multiple Choice

Sally Garcia devotes all of her income to the consumption of two goods, apples and Reese's Peanut Butter Cups.She has just discovered that at her current level of consumption the marginal utility of an apple is 6 and the marginal utility of a Reese's Peanut Butter Cup is 8.Suppose the price of an apple is $0.20, while the price of a Reese's Peanut Butter Cup is $0.25.To maximize her total utility, assuming that the goods are divisible, she would:

• A) consume more Reese's Butter Cups and fewer apples.
• B) consume less of both goods.
• C) consume more apples and fewer Reese's Butter Cups.
• D) there is not enough information to justify a change in her current level of consumption.

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Definitions:

Present Value of Annuity

The current worth of a series of cash flows generated by an annuity, calculated using a particular rate of return or discount rate.

Series of Payments

Regular payments made over a period, often associated with loans or annuities, where each payment is the same amount.

Semiannual Payments

Payments that are made twice a year, often encountered in the context of loan repayments or bond interest payments.

Compounded Semiannually

Compounded semiannually refers to the process of applying interest to an initial amount and the accumulated interest over two periods within a year.