Answer
She is not buying a utility-maximizing combination of bread and milk.
Mrs. Simpson should spend 96 cents on bread and 84 cents on milk.
Work Step by Step
STEP I:
Algebraically, the utility-maximizing rule is fulfilled when
$\frac{MU of Product A}{Price of A} = \frac{MU of Product B}{Price of B}$ ___________(1)
and the consumer’s total income is spent.
MU of Product A = 80;
Price of A = 1 dollar
MU of Product B = 70;
Price of B = 0.8 dollar
Putting these values in equation (1), we get:
LHS (Left Hand Side) = 80
RHS Right hand Side) = 87.5
Since these values are not equal this is not a utility maximizing combination.
STEP II:
We have,
total money that Mrs. Simpson can spend on bread and milk = 1.8 dollars
Let's assume that she spends x and $(1.8-x)$ on bread and milk respectively.
From the utility-maximizing rule, we have
$\frac{80}{x}$ = $\frac{70}{1.8-x}$
On solving the above equation, we get 96 and 84 cents respectively.
Hence, Mrs. Simpson should spend 96 cents on bread and 84 cents on milk.
