Assume an individual is currently using all of his income to consume t

Assume an individual is currently using all of his income to consume two goods — X and Y.

If the prices of X and Y are $3 and $8, respectively, and the marginal rate of substitution of X for Y is four, is this individual maximizing his net benefits from consumption? If not, what should he do to increase his total utility?

ANSWER

The individual is not maximizing his total utility because MRSxy = MUx/MUy = 4 > Px/Py = 0.375. The individual should increase his consumption of X and decrease his consumption of Y. This would cause the marginal utility of X to decrease and the marginal utility of Y to increase, causing MRSxy to decline.