Nate is currently spending his entire budget on two goods: food and entertainment. He was willing to pay $\$ 2$ for the last unit of food he purchased and $\$ 2,000$ for the last unit of entertainment he purchased.

Which of the following is the best explanation of why he is willing to pay so much more for entertainment?

Choose 1 answer:
(A) Nate is irrational and doesn't understand that food is a necessity and entertainment is not.
B) Nate's total utility from entertainment is higher than his total utility from food
(c) Nate's total utility from food is higher than his total utility from entertainment.
(D) Nate's marginal utility from food is higher than his marginal utility of entertainment
(E) Nate's marginal utility from entertainment is higher than his marginal utility of food

Question

Nate is currently spending his entire budget on two goods: food and entertainment. He was willing to pay $\$ 2$ for the last unit of food he purchased and $\$ 2,000$ for the last unit of entertainment he purchased.

Which of the following is the best explanation of why he is willing to pay so much more for entertainment?

Choose 1 answer:
(A) Nate is irrational and doesn't understand that food is a necessity and entertainment is not.
B) Nate's total utility from entertainment is higher than his total utility from food
(c) Nate's total utility from food is higher than his total utility from entertainment.
(D) Nate's marginal utility from food is higher than his marginal utility of entertainment
(E) Nate's marginal utility from entertainment is higher than his marginal utility of food

Accepted Answer

∻Solution∻ ‖ a ⋮ Understanding Marginal Utility: Marginal utility is the additional satisfaction or utility that a consumer derives from consuming an additional unit of a good or service. ‖ ‖ b ⋮ Consumer Optimal Decision Rule: Consumers allocate their budget to maximize total utility, equating the marginal utility per dollar spent across all goods. This is represented by the equation $\frac{MU_{food}}{P_{food}} = \frac{MU_{entertainment}}{P_{entertainment}}$, where $MU$ is marginal utility and $P$ is price. ‖ ‖ c ⋮ Analysis of Nate's Spending: Given that Nate is willing to pay $2 for the last unit of food and $2,000 for the last unit of entertainment, and assuming he is rational and follows the optimal decision rule, the marginal utility per dollar spent on entertainment must be equal to the marginal utility per dollar spent on food. ‖ ∻Answer∻ ⚹ (E) Nate's marginal utility from entertainment is higher than his marginal utility of food ⚹ ∻Key Concept∻ ⚹ Marginal Utility Per Dollar Spent ⚹ ∻Explanation∻ ⚹ Nate is willing to pay more for the last unit of entertainment because the marginal utility he receives from that last unit of entertainment, relative to its price, is equal to the marginal utility per dollar spent on food. This indicates that the marginal utility from entertainment is higher than that from food, as he spends more on entertainment to achieve this equality. ⚹◊1. How does Nate's willingness to pay for the last unit of entertainment compared to the last unit of food reflect his utility maximization in budget allocation according to the theory of consumer behavior in macroeconomics?⍭ Generate me a similar question◊

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