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

Question

Ron starts out in consumer equilibrium,consuming two goods,X and Y.The price of Y rises.Immediately after the rise in price A)MU_X/P_X > MU_Y/P_Y,and then Ron increases his consumption of Y. B)MU_X/P_X > MU_Y/P_Y,and then Ron decreases his consumption of Y. C)MU_X/P_X < MU_Y/P_Y,and then Ron increases his consumption of Y. D)MU_X/P_X < MU_Y/P_Y,and then Ron decreases his consumption of Y. E)none of the above.

Quizplus · Accepted Answer

When the price of good Y rises, the marginal utility per dollar spent on Y decreases relative to the marginal utility per dollar spent on good X. Therefore, Ron should decrease his consumption of Y and increase his consumption of X in order to remain in consumer equilibrium. This is represented by the inequality:

MUS1U1B1X / PS1U1B1X > MUS1U1B1Y / PS1U1B1Y

which simplifies to:

MUS1U1B1X / MUS1U1B1Y > PS1U1B1X / PS1U1B1Y

Since MUS1U1B1X / MUS1U1B1Y > 1 (since the consumer is already in equilibrium), it follows that PS1U1B1X / PS1U1B1Y must also be greater than 1 in order for Ron to decrease his consumption of good Y. Therefore, the correct answer is B.

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