Frank buys only milk and cereal, both of which are normal goods, and he always maximizes his utility. Frank's boss cuts Frank's pay by $200 per month. What happens to Frank's marginal rate of substitution between milk and cereal?
A) It fluctuates randomly.
B) It decreases.
C) It increases.
D) It stays constant.

Question

Quizplus · Accepted Answer

The marginal rate of substitution (MRS) depends on Frank's preferences and the relative prices of milk and cereal, not his income. Since both goods are normal and his preferences remain unchanged, the MRS stays constant despite the income change.

Frank Buys Only Milk and Cereal, Both of Which Are