Initially, a consumer is at an optimum. Then the price of Y increases. Consequently A) MUX/PX MUY/PY. C) MUX/PX = MUY/PY. D) MUX MUY.

Question

Initially, a consumer is at an optimum. Then the price of Y increases. Consequently
A) MUX/PX < MUY/PY.
B) MUX/PX > MUY/PY.
C) MUX/PX = MUY/PY.
D) MUX > MUY.

Quizplus · Accepted Answer

When the price of good Y increases, the consumer will adjust consumption to restore equilibrium where the marginal utility per dollar spent on X is greater than the marginal utility per dollar spent on Y, because Y has become relatively more expensive. This adjustment ensures that the consumer maximizes utility given the new price conditions.

Initially, a Consumer Is at an Optimum