Teddy buys only chocolate chip cookies and hot chocolate and spends all of his income on the two items. Suppose the price of a cookie rises. According to marginal utility theory, Teddy buys
A) more cookies.
B) fewer cookies.
C) more hot chocolate.
D) an equal amount of cookies and hot chocolate.

Question

Quizplus · Accepted Answer

According to marginal utility theory, if the price of cookies rises, the marginal utility per dollar spent on cookies decreases, leading Teddy to buy fewer cookies and potentially more of the other good, hot chocolate, to maximize his utility.

Teddy Buys Only Chocolate Chip Cookies and Hot Chocolate and Spends