Example: Suppose Saron has 7 Birr to be spent on two goods: banana and bread. The unit price of banana is 1 Birr and the unit price of a loaf of bread is 4 Birr. The total utility she obtains from consumption of each good is given below.

Answer 1

Suppose Saron decides to spend 3 Birr on bananas, which means she can buy 3 bananas. The total utility she obtains from consuming 3 bananas is 30.

Alternatively, she can decide to spend 4 Birr on a loaf of bread. The total utility she obtains from consuming a loaf of bread is 20.

If Saron decides to spend all 7 Birr and buy both bananas and bread, she can buy 3 bananas and 1 loaf of bread. The total utility she obtains from this consumption bundle is 50 (30 from bananas + 20 from bread).

Based on these total utility values, Saron may choose to either spend all 7 Birr on bananas, all 7 Birr on bread, or a combination of both that maximizes her total utility.