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:
A) the marginal utility of peanut butter and of ice cream will rise.
B) the marginal utility of peanut butter and of ice cream will fall.
C) the marginal utility of peanut butter will fall, and the marginal utility of ice cream will rise.
D) the marginal utility of peanut butter will rise, and the marginal utility of ice cream will fall.

Question

Quizplus · Accepted Answer

When the price of peanut butter rises, Jill will consume less peanut butter and more ice cream to maintain her utility. As she consumes less peanut butter, its marginal utility increases because she values each unit more when she has less of it. Conversely, as she consumes more ice cream, its marginal utility decreases because the additional satisfaction from each extra unit of ice cream diminishes.

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