Betty is maximizing her satisfaction consuming two goods, A and B. If the marginal utility of A is twice that of B, what is the price of A if the price of B is R4.98?
To maximize satisfaction, Betty should consume goods A and B such that the marginal utility per rand spent is equal for both goods.
Given that the marginal utility of A is twice that of B, let's call the marginal utility per rand spent for A x and for B y.
So, x = 2y
If the price of B is R4.98, then the marginal utility per rand spent for B is:
y = 1/(price of B) = 1/4.98 ≈ 0.2
Since x = 2y, the marginal utility per rand spent for A is:
x = 2y = 2(0.2) = 0.4
Therefore, the price of A should be:
Price of A = 1/x = 1/0.4 = R2.50
So, the price of A is R2.50.