Ron starts out in consumer equilibrium, consuming two goods, X and Y. The price of X rises. Immediately after the rise in price A)MUX/PX MUY/PY, and then Ron increases his consumption of X. B)MUX/PX MUY/PY, and then Ron decreases his consumption of X. C)MUX/PX

Question

Ron starts out in consumer equilibrium, consuming two goods, X and Y. The price of X rises. Immediately after the rise in price A)MUX/PX > MUY/PY, and then Ron increases his consumption of X. B)MUX/PX > MUY/PY, and then Ron decreases his consumption of X. C)MUX/PX < MUY/PY, and then Ron increases his consumption of X. D)MUX/PX < MUY/PY, and then Ron decreases his consumption of X. E)MUX/PX > MUY/PY, and then Ron increases his consumption of X and Y.

Quizplus · Accepted Answer

When the price of X rises, its marginal utility per dollar (MUX/PX) decreases relative to the marginal utility per dollar of Y (MUY/PY). Therefore, Ron should decrease his consumption of X and increase his consumption of Y in order to maintain his consumer equilibrium.

Ron Starts Out in Consumer Equilibrium, Consuming Two Goods, X