Answer:
a. Toby is not maximizing his utility
b. Toby should reduce his spending on cashew and increase his spending on peanuts.
Explanation:
a. Is Toby maximizing his total utility from the kinds of nuts? If so, explain how you know.
Toby will maximize his utility when we have:
MUp/Pp = MUc/Pc
Where;
MUp/Pp = Marginal utility of peanut divided by price of peanut = 100/10 = 10
MUc/Pc = Marginal utility of cashew divided by price of cash = 200/25 = 8
From the above, Toby is not maximizing his utility. I am able to know this because MUp/Pp > MUc/Pc (i.e. 10 > 8). An Toby will only maximize his utility when MUp/Pp = MUc/Pc.
b. If not, how should he rearrange his spending?
Since MUp/Pp > MUc/Pc (i.e. 10 > 8), Toby should reduce his spending on cashew in order to increase MUc and increase his spending on peanuts reduce MUp until MUp/Pp = MUc/Pc.
Based on Tobey's current level of consumption of peanuts and cashews, the answer is that he is not maximizing his utility.
In order to be maximizing his utility, the following has to be true:
Marginal utility of consuming peanuts / Price of peanuts = Marginal utility of consuming cashews / Price of cashews
Solving gives:
100 / 0.10 = 200 / 0.25
1,000 ≠ 800
As the formula does not hold, it means that Tobey is not maximizing his utility.
Find out more on maximizing utility at https://brainly.com/question/15829138.
