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

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)MUX/PX > MUY/PY, and then Ron increases his consumption of X. B)MUX/PX > MUY/PY, and then Ron decreases his consumption of X. C)MUX/PX < MUY/PY, and then Ron increases his consumption of X. D)MUX/PX < MUY/PY, and then Ron decreases his consumption of X. E)none of the above.

Quizplus · Accepted Answer

When the price of X rises, the marginal utility per dollar spent on X decreases (MUX/PX), while the marginal utility per dollar spent on Y remains the same (MUY/PY). Therefore, it is optimal for Ron to consume less of X and more of Y, leading to a decrease in his consumption of X. This is indicated by choice D, where MUX/PX < MUY/PY and Ron decreases his consumption of X.

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