Jill Smith, a careful maximizer of utility, consumes only two goods, peanut butter and ice cream.She had just achieved the utility-maximizing solution in her consumption of the two goods when the price of peanut butter rose.As she adjusts to this event, she will consume:
A) more peanut butter and more ice cream.
B) less peanut butter and less ice cream.
C) more peanut butter and less ice cream.
D) less peanut butter and more ice cream.

Question

Quizplus · Accepted Answer

When the price of peanut butter rises, Jill will want to consume less peanut butter and substitute it with another good, in this case, ice cream. This is because the substitution effect is greater than the income effect since peanut butter has become relatively more expensive. Therefore, the new utility-maximizing solution for Jill will involve consuming less peanut butter and more ice cream. Option D is the only one that reflects this behavioral change.

Jill Smith, a Careful Maximizer of Utility, Consumes Only Two