Question

Suppose an individual's consumption of Red Bull and coffee is in equilibrium: M U R E...

Suppose an individual's consumption of Red Bull and coffee is in equilibrium:

M U R E D B U L L P R E D B U L L = M U C O F F E E P C O F F E E

Now Suppose that the price of coffee of declines. Which of the following could bring the consumption back to an equilibrium point based on the tenets of utility maximization?

Group of answer choices

A decrease in the consumption of coffee will increase the marginal utility of coffee, which will equate the two marginal utility to price ratios.

An increase in the consumption of coffee will reduce the marginal utility of coffee, which will equate the two marginal utility to price ratios.

An increase in the consumption of Red Bull will decrease the marginal utility of Red Bull, which will equate the two marginal utility to price ratios.

An increase in the consumption of Red Bull will increase the marginal utility of Red Bull, which will equate the two marginal utility to price ratios.

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Answer #1

Ans. An increase in the consumption of coffee will reduce the marginal utility of coffee, which will equate the two marginal utility to price ratios.

Assuming that individuals consumption of Red bull and coffee are in equilibrium .

Assuming Red Bull as X Commodity & Coffee as Y commodity. This situation will be represented by the following equation:M.UX/PX= M.UY/PY

Now if Price of Coffee declines , it will result into , M.UX/PX<M.UY/PX..i.e satisfaction which consumer derives from coffee will become greater than what he is enjoying from the consumption of redbull. As a result consumption of coffee will increase till again an increase in the consumption of coffee will reduce the marginal utility of coffee and following condition is achieved again.

M.UX/PX =M.UY/PY

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