A consumer is in equilibrium. She then discovers that the marginal utility per d

Question

A consumer is in equilibrium. She then discovers that the marginal utility per dollar spent on root beer is more than the marginal utility per dollar spent on gasoline. She knows then that the price of:

A) root beer must have increased B)Gasoline must have increased or the price of root beer must have decreased c) gasoline must have decreased D) gasoline must have decreased or price of root beer must have increased

2) a decrease in the price of good causes the:

A) marginal utility of the good to decrease.

B) utility of the good to decrease

C) purchasing power of a person's money to increase.

D) nominal wealth of a person to increase

Explanation / Answer

Answer.) D) gasoline must have decreased or price of root beer must have increased

Let x identify root beer and y identify gasoline. In equilibrium,

MUx ( Px) = MUy ( Py) ...(1)

Now, If the marginal utility per dollar spent on root beer is more than the marginal utility per dollar spent on gasoline, then it must be that

MUx ( Px) > MUy ( Py) ....(2)

Comparing (1) and (2), we conclude that, the price of gasoline must have decreased or the price of root beer must have increased.

Q2.) C) purchasing power of a person's money to increase.

Remember that higher inflation erodes the purchasing power of money.

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