Kawamura,a careful utility maximizer,consumes peanut butter and ice cream.Assume that both peanut butter and ice cream are normal goods and that diminishing marginal utility applies to both goods.Right after he achieves the utility-maximizing level of consumption of the two goods,the price of peanut butter falls.After he adjusts to this event,the marginal utility of peanut butter goes _ and that of ice cream goes _.

A) up;up
B) down;down
C) down;up
D) up;down

Question

Kawamura,a careful utility maximizer,consumes peanut butter and ice cream.Assume that both peanut butter and ice cream are normal goods and that diminishing marginal utility applies to both goods.Right after he achieves the utility-maximizing level of consumption of the two goods,the price of peanut butter falls.After he adjusts to this event,the marginal utility of peanut butter goes _____ and that of ice cream goes _____.

A) up;up
B) down;down
C) down;up
D) up;down

Gianna Occhibove · Accepted Answer

Final Answer : C, Explanation :  When the price of peanut butter falls, Kawamura will consume more peanut butter due to the substitution effect, leading to a decrease in its marginal utility due to diminishing marginal utility. To maintain utility maximization, he will adjust his consumption, likely consuming less ice cream and more peanut butter, which increases the marginal utility of ice cream as he consumes less of it.

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