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

Question

Quizplus · Accepted Answer

When the price of broccoli increases, Smedley will consume less broccoli due to the substitution effect and the income effect. As broccoli is a normal good, the income effect will also lead to less consumption. To maximize utility, he will substitute towards more peanut butter, which is now relatively cheaper.

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