Detail

1. Charlene has $10 that she can spend on either apples or bananas. Both apples and bananas cost $1 each. Charlene finds that if she buys 8 apples and 2 bananas the ratio of her marginal utility of bananas to apples is 4. In order to maximize utility, Charlene should:

We know that the ratio of Charlene's marginal utility of bananas to apples is 4 which means that a banana gives her 4 times as much utility as an apple, but it costs the same. Without spending more money she can buy fewer apples and more bananas and make herself better off. This would be equivalent to moving from a point like I, to the right, to a point like II which would put her on a higher indifference curve.