A consumer buys 12 units of entertainment and 84 units of "all other things." The consumer's income elasticity of demand is greater than 1 for entertainment and less than 1 for all other things.If income increases by 10%,then the consumer's marginal rate of substitution at the utility-maximizing market bundle will:
A) increase.
B) decrease.
C) be equal to 1.
D) remain constant.
E) There is insufficient information to answer the question.

Question

Quizplus · Accepted Answer

The marginal rate of substitution (MRS) will increase because the consumer will buy relatively more of the entertainment (a good with an income elasticity greater than 1, indicating it's a normal good) and relatively less of "all other things" (with an income elasticity less than 1, indicating it's a necessity or inferior good). As income increases, the consumer shifts consumption towards goods with higher income elasticity, altering the MRS.

A Consumer Buys 12 Units of Entertainment and 84 Units