Kawamura, a careful utility maximizer, consumes peanut butter and ice cream. Assume that both peanut butter and ice cream are normal goods and that diminishing marginal utility applies to both goods. He had just achieved the utility-maximizing solution in his consumption of the two goods when the price of peanut butter fells. As he adjusted to this event, the marginal utility of peanut butter _____ and the marginal utility of ice cream _____.
A) rose; rose
B) fell; fell
C) fell; rose
D) rose; fell

Question

Quizplus · Accepted Answer

As the price of peanut butter falls, Kawamura will consume more of it, leading to a decrease in its marginal utility. Since peanut butter and ice cream are substitutes, the decrease in the marginal utility of peanut butter will lead to an increase in the marginal utility of ice cream.

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