Suppose that a consumer who spends her budget on X and Y is initially at equilibrium. If the price of X increases, then the MU/P of X will
A)decrease and the consumer will respond by buying more Y and less X.
B)decrease and the consumer will respond by buying more X and less Y.
C)increase and the consumer will respond by buying more Y and less X.
D)increase and the consumer will respond by buying more X and less Y.

Question

Quizplus · Accepted Answer

When the price of X increases, the marginal utility per dollar spent on X (MU/P) decreases because the consumer gets less utility for each dollar spent on X. As a result, the consumer will adjust her consumption to buy more of Y and less of X to maximize utility, moving towards a new equilibrium.

Suppose That a Consumer Who Spends Her Budget on X