Suppose at the consumer's current consumption bundle the marginal rate of substitution of cheese for wine is ½ bottle of wine per pound of cheese. The price of one pound of cheese is $6, and the price of a bottle of wine is $10. The consumer should increase his consumption of
A) cheese, decrease his consumption of wine, and move to a lower indifference curve.
B) cheese, decrease his consumption of wine, and move to a higher indifference curve.
C) wine, decrease consumption of cheese, and move to a higher indifference curve.
D) cheese, decrease consumption of wine, and remain on the same indifference curve.

Question

Quizplus · Accepted Answer

The marginal rate of substitution of cheese for wine is the amount of wine the consumer is willing to give up for another unit of cheese. In this case, the consumer is willing to give up half a bottle of wine for one pound of cheese. The price ratio of cheese to wine is 6/10 or 0.6. This means that the consumer is currently consuming cheese and wine in a ratio that is more expensive than their relative prices. In order to achieve a lower cost ratio and maximize utility, the consumer should increase their consumption of cheese and decrease their consumption of wine until the marginal rate of substitution equals the price ratio of cheese to wine (which is 0.6 in this case). Moving to a higher indifference curve means increasing utility. Therefore, the correct answer is B: cheese, decrease his consumption of wine, and move to a higher indifference curve.

Suppose at the Consumer's Current Consumption Bundle the Marginal Rate