Question

In: Economics

If a consumer is initially at an​ optimum, and then the price of X​ falls, then...

If a consumer is initially at an​ optimum, and then the price of X​ falls, then

A. MUX​/MUY​ < PY​/PX.

B. MUX​/PX​ > MUY​/PY.

C. MUX​/PX​ < MUY​/PY.

D. MUX​/PX​ = MUY​/PY.

Solutions

Expert Solution

Option B is correct.

Explanation:

At equilibrium, the ratio of marginal utility derived from the good to its price must be equal for all goods. This can be represented as-

OR

If price of good X (or Px) were to fall, the ratio of marginal utility derived from good x to its price would increase, i.e MUx/Px would increase. MUy/Py would remain unchanged. As a result,

This is shown in Option B. Therefore, option B is correct.

Option A is incorrect because the equation is represented incorrectly. As shown above, MUx/MUy= Px/Py, Px should be in the numerator in the price ratio not the denominator.

Option C is incorrect because a reduction in Px will increase the ratio of MUx to Px relative to MUy to Py.

Option D is incorrect because it shows the equilibrium condition. Once the price of x falls, the ratio will change and they will no longer be equal.

Rahul Sunny answered 2 years ago
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