Michael Kawamura, a careful maximizer of utility, consumes only two goods, peanut butter and ice cream.He had just achieved the utility-maximizing solution in his consumption of the two goods when the price of peanut butter fell.As he adjusts to this event he will consume:
A) more peanut butter and less ice cream.
B) less peanut butter and less ice cream.
C) more peanut butter and more ice cream.
D) less peanut butter and more ice cream.

Question

Quizplus · Accepted Answer

Since Michael is a careful maximizer of utility, he will adjust his consumption based on the change in price. As the price of peanut butter falls, it becomes relatively cheaper compared to ice cream. To maximize his utility, Michael will consume more of the now relatively cheaper peanut butter and less of the relatively more expensive ice cream. Therefore, he will consume more peanut butter and less ice cream, resulting in choice A being the correct answer.

Michael Kawamura, a Careful Maximizer of Utility, Consumes Only Two