Billy has a $20 budget to spend on yogurt and cereal.Yogurt cost $2 each and cereal costs $4 each.Suppose that the quantity of yogurt is on the vertical axis and the quantity of cereal is on the horizontal axis.If the price of yogurt increases,which of the following is true?
i.The budget line rotates outward.
ii.Yogurt's marginal utility per dollar decreases.
iii.The relative price of yogurt increases.
A) i and ii
B) i and iii
C) ii and iii
D) i, ii, and iii
E) Only i

Question

Quizplus · Accepted Answer

If the price of yogurt increases, the budget line will not rotate outward as the total budget remains the same. However, the relative price of yogurt increases, as it now costs more relative to cereal. This means that the consumer will have to give up more cereal to purchase the same amount of yogurt, leading to a decrease in the marginal utility per dollar of yogurt. Therefore, options ii and iii are correct, and option C is the best choice.

Billy Has a $20 Budget to Spend on Yogurt and Cereal.Yogurt