In the theory of the consumer behaviour; a consumer is said to maximize utility when?

A. Marginal utility of a commodity is equal to the price paid for it
B. Marginal utility of a commodity X is equal to the price of commodity Y
C. Average utility of a commodity is equal to the price paid for it
D. Total utility of a commodity is equal to the price paid for it

Correct Answer:

Option A – Marginal utility of a commodity is equal to the price paid for it

Explanation

MUx/Px = MUy/Py, where MUx is the marginal utility derived from good x, Px is the price of good x, MUy is the marginal utility of good y and Py is the price of good Y. A consumer should spend his limited money income on the goods which give him the most marginal utility per dollar. Only when the ratio of MU/P is equal for all goods is a consumer maximizing his total utility.