Smedley, a careful utility maximizer, consumes peanut butter and ice cream. Assume that both peanut butter and ice cream are normal goods. He had just achieved the utility-maximizing solution in his consumption of the two goods when the price of ice cream increased. As he adjusted to this event, he consumed _____ peanut butter and _____ ice cream.
A) more; more
B) less; less
C) more; less
D) less; more

Question

Quizplus · Accepted Answer

When the price of ice cream increases, Smedley will consume less ice cream due to the substitution effect. As both goods are normal, the income effect will also lead him to consume less ice cream. To maintain utility maximization, he will substitute towards consuming more peanut butter.

Smedley, a Careful Utility Maximizer, Consumes Peanut Butter and Ice