A student buys only two goods pizza and books. The price of pizza is $5 and the price of books is $10. At the student's present level of consumption, her marginal utility of pizza is 4 and her marginal utility of books is 2. Currently, the student is spending all her income.A. Is this student currently in consumer equilibrium (maximizing utility)? Explain using a graph.B. What would this student have to do in order to increase her utility? Use the diagram from part (a) to explain your answer.
What will be an ideal response?
A. At first the student is not maximizing because the slope of the indifference curve is stepper than the slope of the budget line (point A).
B. In order to increase utility she needs to consume more pizza and less books up to where the slope of the indifference curve is the same as the slope of the budget line. This happens at point B.
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