Ron starts out in consumer equilibrium,consuming two goods,X and Y.The price of X rises.Immediately after the rise in price A)MU_X/P_X MU_Y/P_Y,and then Ron increases his consumption of X. B)MU_X/P_X MU_Y/P_Y,and then Ron decreases his consumption of X. C)MU_X/P_X

Question

Ron starts out in consumer equilibrium,consuming two goods,X and Y.The price of X rises.Immediately after the rise in price A)MU_X/P_X > MU_Y/P_Y,and then Ron increases his consumption of X. B)MU_X/P_X > MU_Y/P_Y,and then Ron decreases his consumption of X. C)MU_X/P_X < MU_Y/P_Y,and then Ron increases his consumption of X. D)MU_X/P_X < MU_Y/P_Y,and then Ron decreases his consumption of X. E)MU_X/P_X > MU_Y/P_Y,and then Ron increases his consumption of X and Y.

Quizplus · Accepted Answer

When the price of X rises, the marginal utility per dollar spent on X decreases (MU_X/P_X decreases), making X less attractive. In contrast, the marginal utility per dollar spent on Y remains the same, assuming no changes to the price of Y. Therefore, the ratio of MU_Y/P_Y is now greater than the ratio of MU_X/P_X, indicating that Y has become relatively more attractive than X. As a result, Ron decreases his consumption of X and increases his consumption of Y to reach a new consumer equilibrium.

Ron Starts Out in Consumer Equilibrium,consuming Two Goods,X and Y