A consumer buys 12 units of entertainment,measured on the horizontal axis,and 84 units of "all other things." The consumer's income elasticity of demand is equal to 1 for both goods.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

Since the income elasticity of demand for both goods is equal to 1, a 10% increase in income will lead to a proportional 10% increase in the quantity demanded for both goods, keeping the consumer's marginal rate of substitution (MRS) between the two goods constant. The MRS depends on the ratio of the marginal utilities of the two goods, which remains unchanged if the consumption of both goods increases proportionally.

A Consumer Buys 12 Units of Entertainment,measured on the Horizontal