FIGURE 6- 2
-Refer to Figure 6- 2. Suppose the price of Y is $1 and the consumer's income is $10. Initially, the price of X is $2 and the consumer is buying 3 units of good X and 4 units of good Y. If the price of X then falls to $1, what quantities of X and Y will he/she now purchase in order to maximize total utility?
A) 5 X and 5 Y.
B) 6 X and 4 Y.
C) 2 X and 8 Y.
D) 4 X and 6 Y.
E) 3 X and 7 Y.

Question

FIGURE 6- 2
-Refer to Figure 6- 2. Suppose the price of Y is $1 and the consumer's income is $10. Initially, the price of X is $2 and the consumer is buying 3 units of good X and 4 units of good Y. If the price of X then falls to $1, what quantities of X and Y will he/she now purchase in order to maximize total utility?
A) 5 X and 5 Y. 
B) 6 X and 4 Y. 
C) 2 X and 8 Y. 
D) 4 X and 6 Y. 
E) 3 X and 7 Y.

Quizplus · Accepted Answer

Initially, the consumer is spending $3 on X and $4 on Y, which exhausts his/her income of $10. The marginal utility per dollar spent on X is 4/2 = 2, while the marginal utility per dollar spent on Y is 3/1 = 3. Therefore, the consumer should allocate more of his/her budget to Y, since it provides him/her with more utility per dollar spent. 
When the price of X falls to $1, the consumer can now buy 6 units of X and still be able to afford 4 units of Y (since 6*1 + 4*1 = $10). At this point, the marginal utility per dollar spent on X is 3, while the marginal utility per dollar spent on Y is still 3. Therefore, the consumer should continue to allocate his/her budget in the same way as initially, buying 4 units of Y and 6 units of X. This will maximize total utility.

FIGURE 6- 2 -Refer to Figure 6- 2. Suppose the Price of Y