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3 October, 01:51

Monica consumes only goods A and B. Suppose that her marginal utility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of A is $0.50, the price of B is $4.00, and the Monica's income is $120.00, how much of good A will she purchase?

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  1. 3 October, 02:07
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    Answer: The answer is 120.

    Explanation: We know that consumer balance occurs when:

    Marginal utility of A / Price of A = Marginal utility of B / Price of B

    And we know that the budget restriction is: 120 = 0.5Qa + 4Qb

    So the consumer balance is:

    1 / 0.5Qa = 1 / 4Qb

    0.5Qa = 4Qb

    Qa = 4 / 0.5 Qb

    Qa = 8Qb

    We replace:

    120 = 0.5Qa + 4Qb = 4Qb + 4Qb = 8Qb

    Qb = 120/8 = 15

    Qa = 8Qb = 15 * 8 = 120
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