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Utility Maximization After Price Change
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Arrange the steps for adjusting consumption after a price change to maximize utility.

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Learning Path
Learning Path

Question & Answer
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Choose the Best Answer

A

Compare marginal utility per dollar for each good → B. Identify the good with the highest marginal utility per dollar → C. Adjust consumption towards that good → D. Reassess budget allocation based on new prices

B

Identify the good with the highest marginal utility per dollar → A. Compare marginal utility per dollar for each good → C. Adjust consumption towards that good → D. Reassess budget allocation based on new prices

C

Adjust consumption towards that good → A. Compare marginal utility per dollar for each good → B. Identify the good with the highest marginal utility per dollar → D. Reassess budget allocation based on new prices

D

Reassess budget allocation based on new prices → A. Compare marginal utility per dollar for each good → B. Identify the good with the highest marginal utility per dollar → C. Adjust consumption towards that good

Understanding the Answer

Let's break down why this is correct

Answer

When the price of a good changes, consumers want to adjust their spending to get the most satisfaction, or utility, from their purchases. First, they need to recognize that the price of a good has changed, which may lead them to reassess how much of that good they can buy. Next, they should compare the new price with the prices of other goods to see if they can find better options that provide similar satisfaction. For example, if the price of apples increases, a consumer might decide to buy more bananas instead if they are cheaper and still tasty. Finally, by reallocating their budget based on these comparisons, they can maximize their overall utility by choosing the combination of goods that gives them the greatest satisfaction for their spending.

Detailed Explanation

This order helps you find the best way to spend your money. Other options are incorrect because This option suggests picking a good before comparing; This option skips the important step of comparison.

Key Concepts

Utility Maximization
Marginal Utility
Budget Allocation
Topic

Utility Maximization After Price Change

Difficulty

medium level question

Cognitive Level

understand

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