Two goods in an individual's consumption bundle are perfect substitutes.For a given amount of income, the individual's optimal consumption bundle will be:
A)a bundle that is made up of exactly 50% of each of the two goods.
B)a bundle that is made up entirely of the good that has the lower price.
C)a bundle that is made up entirely of the good that has the higher price.
D)the bundle that contains all of the horizontal axis good.

Question

Quizplus · Accepted Answer

When two goods are perfect substitutes, the individual will always choose the good that has the lower price. This is because the individual can get the same amount of utility from consuming either good, so it makes sense to choose the cheaper one. Therefore, the individual's optimal consumption bundle will be made up entirely of the good that has the lower price.

Two Goods in an Individual's Consumption Bundle Are Perfect Substitutes