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)none of the above.

Quizplus · Accepted Answer

Ron's marginal utility per dollar spent on X decreases, as the price of X rises. Thus, MUS/PS for good X decreases. Meanwhile, the marginal utility per dollar spent on good Y remains constant. As a result, MUS/PS for good Y is relatively higher than that of good X. To maintain consumer equilibrium, Ron will decrease his consumption of good X and increase his consumption of good Y.

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