Question

Suppose a consumer has allocated his or her income between pizzas and movies such that total utility is maximized. At the equilibrium, if there is a fall in the price of pizza, this consumer will:

a. consume more pizzas.
b. consume more movies.
c. consume less pizzas and less movies.
d. consume less pizzas and the same amount of movies.

Answer 1

When the price of pizza falls, the consumer will consume more pizzas, as long as the marginal utility of the pizza is still greater than the marginal utility of movies.

Step-by-step explanation:

When the price of pizza falls, the consumer will consume more pizzas, as long as the marginal utility of the pizza is still greater than the marginal utility of movies. The consumer allocates their income in such a way that the ratio of marginal utility to price for pizzas matches the ratio of marginal utility to price for movies at the equilibrium point. Therefore, if the price of pizza falls, the consumer will choose to consume more pizzas to maintain the equilibrium point.