A consumer was at an optimum. She then discovers that the marginal utility per dollar spent on food is more than the marginal utility per dollar spent on movies. She knows then that
A) the price of movies must have decreased.
B) the price of food must have increased.
C) the price of movies must have increased or the price of food must have decreased.
D) the price of movies must have decreased or the price of food must have increased.

Question

Quizplus · Accepted Answer

To maximize utility, a consumer should allocate spending so that the marginal utility per dollar spent is equal across all goods. If the marginal utility per dollar spent on food is more than that on movies, it suggests a change in relative prices or consumption that has disturbed this balance. This could happen if the price of movies increased (making each dollar spent there less valuable in terms of utility) or if the price of food decreased (increasing the utility per dollar spent on food).

A Consumer Was at an Optimum