If MU_x/P_x

Question

If MU_x/P_x < MU_y/P_y, then A) spending a dollar less on Y and a dollar more on X increases utility. B) spending a dollar less on X and a dollar more on Y increases utility. C) X is more expensive than Y. D) Y is more expensive than X.

Quizplus · Accepted Answer

The given inequality suggests that the marginal utility per dollar spent on Y (MU_y/P_y) is greater than that for X (MU_x/P_x). This implies that reallocating spending from X to Y (spending a dollar less on X and a dollar more on Y) would increase the overall utility, as you get more utility per dollar spent on Y compared to X.

If MUx/Px < MUy/Py, Then

If MU_x/P_x < MU_y/P_y, Then