Question

A utility-maximizing consumer of coffee also enjoys consuming tea. Coffee prices rise, while tea prices do not change. This consumers consumes only these two goods and all else remains the same. For this consumer, consumption of tea will ______________, and marginal utility of coffee will ______________.

Answer 1

consumption of tea will increase , and marginal utility of coffee will increase

Step-by-step explanation:

As Consumer consumes both tea & coffee, they are substitutes goods (which can be inter change-ably used by consumer).

Substitute Goods' price & quantity are inversely related. Such because -

• Price fall of a good makes it relatively cheaper & increases its quantity demanded, decreases other good's demand.
• Price fall of a good makes it relatively expensive & decreases its quantity demanded, increases other good's demand

So: Tea & Coffee being substitutes - If price of coffee rise, its own quantity demanded decreases & tea demand increases.

Coffee quantity demanded decrease means Marginal Utility of coffee will increase, as - MU decreases with more consumption quantity & it increases with less quantity consumption [as per Law of Diminishing Marginal Utility].