If consumer income and prices increase by the same percentage,
A) the consumer will buy more of both goods.
B) the consumer will buy more of both goods if they are both normal goods.
C) the consumer will buy less of both goods if they are both inferior goods.
D) the consumer's utility maximizing bundle stays the same.

Question

Quizplus · Accepted Answer

If consumer income and prices increase by the same percentage, the consumer's real income (purchasing power) remains unchanged. Therefore, the consumer's budget constraint and indifference curves would shift parallelly. The optimal choice would be at the same point where the new budget constraint intersects with the old indifference curve. As a result, the consumer's utility-maximizing bundle would stay the same.

If Consumer Income and Prices Increase by the Same Percentage