Smedley,a careful utility maximizer,consumes peanut butter and ice cream.Assume that both peanut butter and ice cream are normal goods.Right after he achieves the utility-maximizing level of consumption of the two goods,the price of ice cream increases.To adjust to this event,he consumes _____ peanut butter and _____ ice cream.
A)more;more
B)less;less
C)more;less
D)less;more

Question

Quizplus · Accepted Answer

When the price of ice cream increases, Smedley will consume less ice cream because it has become more expensive, reducing the quantity demanded (a movement along the demand curve). To maintain his utility, he will consume more peanut butter, a substitute good, to compensate for the reduced consumption of ice cream. This is consistent with the substitution effect of price changes in consumer theory.

Smedley,a Careful Utility Maximizer,consumes Peanut Butter and Ice Cream