Assume a consumer is currently purchasing a combination of goods,X and Y,that maximizes her utility given her budget constraint,i.e.,MRSX,Y = PX/PY.Now assume that there is a decrease in the price of Y.In this case,to once again maximize her utility,the consumer will want to adjust her purchases of X and Y such that:
A)the marginal rate of substitution of X for Y, i.e., MRSX,Y, decreases.
B)the marginal rate of substitution of X for Y, i.e., MRSX,Y, stays the same.
C)the marginal rate of substitution of X for Y, i.e., MRSX,Y, increases.
D)none of the above. The consumer will continue to maximize her utility after the price change by continuing to consume the same combination of X and Y.

Question

Quizplus · Accepted Answer

When the price of good Y decreases, the consumer's budget constraint shifts outward and her optimal consumption bundle changes. To maximize her utility, the consumer will adjust her consumption of goods X and Y such that the new MRSX,Y equals the new relative price of X and Y. Since the price of Y has decreased, the relative price of X has increased, and the consumer will want to decrease her consumption of X and increase her consumption of Y. This implies that the MRSX,Y will increase, as the consumer is willing to give up more units of X to get additional units of Y. Therefore, option (C) is the correct answer.

Assume a Consumer Is Currently Purchasing a Combination of Goods,X