Question

Suppose that in 2005, the prices of burger and pizza were, respectively, $5 and $1 per...

Suppose that in 2005, the prices of burger and pizza were, respectively, $5 and $1 per slice. In 2015, after some inflation, the prices became $9 and $2, respectively. If we ignore income effects and assume there are no other goods, would you expect this person's consumption of burger and pizza to have changed? Explain.

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Answer #1

The price of pizza and burger have not changed in the same proportion. The price of pizza has exactly doubled but the price of the burger has less than doubled. According to the principle of equimarginal utility, a consumer maximizes utility when the last dollar spent on both the goods derive the same level of utility. Since the price of the goods has changed in different proportions, the consumption of the goods will be changed so that the consumer maximizes his utility.

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